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TMI Blog2015 (4) TMI 949X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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. The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. While determining the comparability of transactions, multiple year data can only be included in the manner provided in Rule 10B(4). As a general rule, it is not open to the assessee to rely upon previous year's data. In the present case, this Court holds that once Brescon, Keynote and Khandwala Securities are held to be functionally similar to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, Keynote, as per its Directors Report for FY 2007-08, is involved in “Lead Managing IPOs, Rights Offers, Buybacks and Takeovers. [It] also expanded its reach in Corporate Finance s order dated 21.09.2012 quoted by the AO in his order dated 19.10.2012 contradicts both these facts: a) bonus was not paid in the ratio of 2:1 and b) the assessee had declared interim dividend of 5,47,47,000/-. Further, the bonuses paid to the two shareholder-directors in the preceding two financial years were in the ratio of 60-65%:40-35%, even though their shareholding was 1:1. The balance sheet of the assessee placed on record also indicates that the two shareholders also hold directorial positions in the assessee. Therefore, the assessee s contention that the bonus was paid to the shareholders in their managerial capacity, like in the case of other managers, cannot be questioned merely on the basis of a speculation by the revenue that such payment was to avoid tax. In such circumstances, the deduction under Section 36(1)(ii) in respect of payment of bonus to the two shareholder-directors is allowed. - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: S. No. Comparable Entity Operating Profit Margins 2005-06 2006-07 2007-08 Average 1. IDFC Investment Advisors Limited - -55.50% 17.30% -19.10% 2. Future Capital Holdings Limited - 0.88% 20.53% 10.71% 3. Khandwala Securities Limited 43.35% 42.62% - 42.99% 4. Sumedha Fiscal Services Limited -16.47 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmal 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 (Rs. 67,91,947) and Kunal Shroff (Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.‖ 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates 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 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: "10B. (1) Determination of arm's length price under section 92C :- . . ************* ********* (e) transactional net margin method, by which,- (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 bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter to the AO to decide the issue of inclusion of M/s Vimta Labs as a comparable M/s Vimta Labs had earned supernormal profits. The ITAT noted the decision in Adobe Systems and directed the matter to be decided in light of that decision and taking into account the submissions of the assessee. 4. Sapient Corporation (P) Ltd. v. Deputy CIT, [2011] 11 Taxmann 69 Directed the exclusion of one of the comparables considered by the TPO (Zenith Infotech Ltd.) TPO cannot exclude all loss making comparables and include an entity (Zenith) making supernormal profits at the same time. Zenith is predominantly a software product company whereas the assessee is a software development services company and a software product company shows higher margin. 5. Nortel Networks India (P) Ltd. v. Additional CIT, [2013] 36 Taxmann 439 (Delhi) Affirmed the exclusion of M/s Arraycom as a comparable. Further held that the TPO has adequately factored the subjective elements in determining the ALP. A concern will not lose its status merely because it is a loss-making entity. However, TPO has not excluded Arraycom for the sole reason that it is a loss- making entity but because it has been showing p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, a number of factors have the cumulative effect of justifying Godrej's exclusion. These are: Godrej makes refrigerators and not TVs, it has suffered huge losses over a period of several years, had huge unutilized capacity, needs financial restructuring, joint venture of the company stands terminated, etc. Re inclusion of Videocon, there are material differences which cannot be eliminated within the meaning of Rule 10B(3). Thus, Videocon has to be excluded as a comparable. 10. Philips Software Centre v. ACIT, [2008] 26 SOT 226 (Bang.) Companies with supernormal profits should have been excluded from the list of comparables by the TPO. An entity making supernormal profits cannot be a comparable. If at all it were to be considered as a comparable, appropriate adjustments to the material differences would have to be made. However, normalization of the margins of super profit making companies is not envisaged on an ad hoc basis and has to be done as per the law. The assessee was a captive contract service provider and it did not bear any business and operational risks 11. E-gain Communication (P) Ltd. v. ITO, [2008] 23 SOT 385 (Pune) Excluded Thirdware Solutions Ltd. and WTI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve to be tested for each year independently. The fact that an entity has been chosen as a comparable for one year does not ipso facto mean that it would be chosen the subsequent year. BCC Fuba India Ltd. was a persistently loss making unit and therefore, it cannot be considered to be a good comparable. Further, in respect of another company, the P&L A/c had an extraordinary item of income on account of sale of business. Therefore, this makes this company as not a good comparable for the year under consideration. 17. Syscom Corporation Ltd. v. ACIT, [2013] 35 Taxmann 600 (Mum) A company cannot be excluded as a comparable solely because it is a high profit making unit. A persistently loss making unit cannot be considered as a comparable. Comparability of an uncontrolled transaction with an international transaction has to be measured by using current year data and only when the current year data does not give a true picture due to abnormal circumstances that multiple year data is used. If profit not supernormal, the mere fact that it is high does not justify exclusion. Unless and until there are specific reasons and factors as provided under Rule 10B, an entity cannot be excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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] ― 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 mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at: ― 21. The sum and substance of the Tribunal's order is that the criteria adopted by the TPO for searching comparables was not correct. Secondly, the TPO had not specifically rejected any of the comparables of the respondent/assessee. The Tribunal was of the view that the comparables of the respondent/assessee ought to have been accepted and, had that been the case, there would have been no need for the TPO to search for comparables. Of course, in passing the order, the Tribunal made certain general observations that unless and until the comparables drawn by the taxpayer were rejected, a fresh search by the TPO could not be conducted. However, this has to be tempered with the relevant statutory provisions which are clearly set out in sub-s. (3) of s. 92C of the said Act which stipulates four situations whereunder the AO/TPO may proceed to determine the ALP in relation to an international transaction. If any one of those four conditions is satisfied, it would be open to the AO/TPO to proceed to determine the ALP. This clarification of the observation of the Tribunal was necessary and that is why we have done so. 22. We also note that the Tribunal had gone further and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the Tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent-assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted. 7. Learned counsel for the appellant Revenue during the course of hearing, drew our attention to the order passed by the TPO and it is pointed out that based upon the figures and data made available, the TPO had treated a third company as comparable when the wage and sale ratio was between 30% to 60%. By applying this filter, several companies were e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An extreme result may be excluded on the basis that a previously overlooked significant comparability defect has been brought to light, not on the sole basis that the results arising from the proposed ―comparable‖ merely appear to be very different from the results observed in other proposed ―comparables‖. 3.64: An 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 a 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 the inclusion or exclusion of loss-making comparables. Indeed, it is the facts and circumstances surrounding the company in question that should determine its status as a comparable, not its financial result. 3.65: Generally speaking, a lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a material effect on transfer pricing conditions that needs to be assessed in determining comparability. The data from earlier years may show whether the independent enterprise engaged in a comparable transaction was affected by comparable economic conditions, or whether different conditions in an earlier year materially affected its price or profit so that it should not be used as a comparable. 3.78: Multiple year data can also improve the process of selecting third party comparables, e.g. by identifying results that may indicate a significant variance from the underlying comparability characteristics of the controlled transaction being reviewed, in some cases leading to the rejection of the comparable, or to detect anomalies in third party information. 3.79: The use of multiple year data does not necessarily imply the use of multiple year averages. Multiple year data and averages can however be used in some circumstances to improve reliability of the range. See paragraphs 3.57-3.62 for a discussion of statistical tools.‖ 30. The reasoning adopted in various judgments noticed above, shows that functional analysis seeks to identify and compare the economically significan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 ―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.‖ 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 provision 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 transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8213;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 transfer 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 years 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o previous years. This Court disagrees. The proviso to Rule 10B(4), read with the sub-rule, itself indicates that the purpose for which previous years‟ data may be considered is - analysing the comparability of an uncontrolled transaction with an international transaction. It does not prescribe that once an uncontrolled transaction has been held to be a „comparable‟, in order to obviate an apparent volatility 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 organisation of 34 countries founded in 1961 to stimulate economic progress and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notes that a recent decision in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT (dated 16.03.2015) relied extensively on the OECD Guidelines. However, the said ruling itself recognized that the provisions of the Act and the Rules "are supreme". Therefore, this Court holds that where they (i.e., the Act and the Rules) adequately cover a field, reliance on the OECD Guidelines is not warranted. At this stage, we deem it fit to quote the 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 Covenants, 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 International 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken into consideration while determining the arm‟s length price, it may only be for the purposes of factoring in material changes in, inter alia, economic conditions, third party variables, etc. 39. This Court proceeds on the basis that there is sufficient guidance and clarity in Rule 10B on the principles applicable for determination of ALP. These include the various factors to be taken into consideration, 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, 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. 40. In the present case, this Court holds that once Brescon, Keynote and Kh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial information of prospective entities; and other related services. On the other hand, Keynote, as per its Directors‟ Report for FY 2007-08, is involved in "Lead Managing IPOs, Rights Offers, Buybacks and Takeovers. [It] also expanded its reach in Corporate Finance & M&A Advisory." The services provided by Keynote also include managing public issue of securities, underwriting, project appraisal, equity research, capital restructuring, loan and lease syndication, placement services, portfolio management, debenture trustee, managing/advising on international offerings of debt/equity, private placement of securities, etc. Evidently, the assessee does not provide any of these services enumerated above. Given such functional differences and the mandate of Rule 10B(2)(b), there could be merit in the argument that Keynote cannot be considered a comparable for determining the ALP. The fact that the assessee had included it in the previous assessment years does not have any bearing on its inclusion for the subject assessment year. In this regard, this Court relies on the Supreme Court‟s decision in Commissioner of Income Tax v. C. Parakh & Co (India) Ltd, 29 ITR 661, where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milarity of Keynote with the assessee. In the event that the DRP finds them to be functionally comparable, it would proceed to carry out the Rule 10B(3) analysis as in the case of Khandwala Securities and Brescon. 43. The final question that arises for this Court‟s determination in the present appeal is the assessee‟s claim for deduction under Section 36(1)(ii) of the Act in respect of the bonus paid by it to its two shareholders - Ashish Dhawan and Kunal Shroff. The lower authorities denied such claim, holding that the bonus was paid to the shareholders in lieu of dividend with the objective of avoiding tax. Such inference was drawn from two facts: a) the bonus paid was in proportion of their shareholding in the assessee company, i.e. 2:1; and b) no dividend had been declared by the assessee. However, a perusal of an excerpt from the DRP‟s order dated 21.09.2012 quoted by the AO in his order dated 19.10.2012 contradicts both these facts: a) bonus was not paid in the ratio of 2:1 and b) the assessee had declared interim dividend of ₹ 5,47,47,000/-. Further, the bonuses paid to the two shareholder-directors in the preceding two financial years were in the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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