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.
The taxpayer and comparable companies pay donation and incur CSR expenditure. These expenses are debited to profit and loss account. These expenses do not have any link to operation or international transactions of the Assessee. They are spent based on management discretion or statutory requirement and should ideally be considered as non-operating in nature.
The issue that came up before the Courts was that whether donation paid is to be considered as operating or non-operating in nature.
Case Laws holding Donation paid is non-operating in nature:
ThyssenKrupp Industries India Private Limited v Addl. CIT (2013) 154 TTJ 0689, [2013] 33 taxmann.com 107 (Mum-Trib) – TNMM was selected as the most appropriate method. While computing the margin of some of the comparables, the taxpayer contended that donation paid is to be considered as operating in nature. The ITAT held that donation paid has no relevance for operation and is therefore to be treated as non-operating in nature.
Other Decisions taking similar view are
- Aris Global Software Pvt Ltd v DCIT (IT(TP)A No.1037/Bang/2011)
- Capital One Services India P. Ltd., vs., DCIT [TS- 214-ITAT-2015-(Bang)-T.P.] – The ITAT held that donation is non-operating in nature and should be excluded from operating cost.
- Evalueserve.Com (P.) Ltd. v. ACIT [2018] 97 taxmann.com 103 (Delhi – Trib.) – The ITAT held that TPO has not made out the interlink between the donations and provisions for doubtful debt while concluding that it is operating in nature. No direct connectivity was made out by the TPO while arriving at the said conclusion. The ITAT concluded that same is non-operating in nature.
Case Laws holding Donation paid is operating in nature
M/s SAP Labs India Pvt Ltd v ACIT [2011] 44 SOT 156 (Bang.). [2010] 8 taxmann.com 207 (Bang.), – The ITAT held that donation paid is regular business expenditure and should be considered as operating in nature.