Rule 10B of Income Tax Rules provides methodology for computation of ALP.  Under TNMM, ‘net profit’ is used as benchmark for ALP computation.  Rule 10B(1)(e)(i) provides for considering “net profit margin realised by the enterprise from an international transaction or SDT entered into with an associated enterprise”.  Rule 10B(1)(e)(ii) provides for computation of ‘net profit margin in uncontrolled comparable transactions’.  Therefore, while computing net margin realized by the enterprises (tested party as well as comparables) all incomes and expenses that are representative or comprised of business obligation should be considered. 

Before the Courts, the issue came up whether dividend income credited to profit and loss account can be considered as operating income.  The Courts have held as follows:

DHL Express (India) Private Limited v ACIT (2011) 46 SOT 0379 (Mumbai ITAT); [2011] 11 taxmann. com 40 (Mum ITAT) – In this case, while computing the margin of the comparable companies, the TPO considered dividend income received by the comparable companies as operating in nature. The taxpayer contended that same is non-operating in nature and should be excluded while computing margins of the comparables.  The ITAT held that dividend income is non-operating in nature because it has nothing to do with the main operations of the taxpayer.

In the case of Ocwen Financial Solutions (P.) Ltd.v. JCIT [2019] 108 taxmann.com 306 (Bangalore ITAT) the Assessee was rendering back office ITES services.  While computing service income filter for comparable (Informed Technologies), the TPO considered ‘other income’ of Rs. 1.22 crores, which comprised of non-operating income, interest, dividend, sale of current investments and miscellaneous income.  Accordingly, service income was computed at 67.7% and it was held that comparable fails service income filter of 75%.  The ITAT held that evidently these incomes cannot be considered as operating income.  Once these incomes are excluded, Informed Technologies passes service income filter and should be selected as comparable.

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