INCOME TAX REFUND – WHETHER OPERATING OR NON-OPERATING FOR PLI COMPUTATION

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 income tax refund received by taxpayer can be considered as operating in nature for computing ALP.  Generally, operating margins are computed before tax.  Both income tax paid and income tax refund have no relation with the operations of the assessee.  The following cases have dealt with this issue.

M/s SAP Labs India Pvt Ltd v ACIT (2012) 134 ITD 253, (2012) 015 ITR 506, (2012) 145 TTJ 0521, [2011] 44 SOT 156 (Bang), [2010] 8 taxmann.com 207 (Bangalore Tribunal) – The Taxpayer is a software development center established by the German Parent.  The taxpayer adopted TNMM as the MAM to determine ALP.  The TPO considered dividend income as non-operating in nature.  The taxpayer contended that income tax refund should be considered part of operating income to compute its margins.  The ITAT rejected the contention on the ground that the operating profit of a taxpayer is computed without considering the income-tax payments as well as income-tax refunds. Therefore, neither income-tax payments could be reduced nor income-tax refund could be increased in adjusting the operating profit of the taxpayer.

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