INSURANCE CLAIM RECEIVED – 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 insurance claim relating to operation received by the Assessee can be considered as operating income while computing PLI. Generally, if the insurance claim is related to operations of the Company, it should be treated as operating in nature.  Further, the expenses related to the insurance claim would be part of operating cost and therefore corresponding income should also be considered as operating in nature.

The following cases have dealt with this issue.

M/s Sony India Pvt Ltd v DCIT [2008] 114 ITD 448 (Del), [2008] 118 TTJ (Del) 865 – The taxpayer had international transactions with its AEs and ALP was computed adopting TNMM as the most appropriate method.  While computing operating margins, the TPO excluded insurance claim received credited to the P&L account from the operating income.

The ITAT observed that insurance claims pertained to recovery of loss/damage suffered by the taxpayer company during its day-to-day operations.  The recovery related to loss transit of goods, due to pilferage, etc.  The ITAT held that such losses and compensation were directly connected to the operations and are therefore operating in nature.

DHL Express (India) (P.) Ltd. v ACIT [2011] 11 taxmann.com 40 (Mum.) : [2011] 46 SOT 379 (Mum.) –  The ITAT held that insurance charges received in relation to normal business activities are to be considered as operating in nature.

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