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 operations of the taxpayer may be situated in the states or areas where certain local taxes may be levied (though such instances are reduced post implementation of GST).  The comparables may not be liable for such taxes. In a competitive market, the taxpayer may not be able to pass on this additional tax to the end customer. In such situations, the taxpayer margins may suffer due to additional tax paid by the taxpayer, which may not be paid by the comparables. The issue that arises is whether such additional tax can be claimed as non-operating in nature. The Courts in the following decisions 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, the prices of which the taxpayer sought to justify by adopting TNMM. While computing margins, the taxpayer excluded Local Area Development Tax (LADT) from the operating expenses on the ground that such payment was not involved in case of comparables. The TPO rejected the contention of the taxpayer. The ITAT upheld the contention of the taxpayer. The ITAT held that statutory levy has nothing to do with the operating profits of the taxpayer.

ACIT v Fiat India Private Limited 2010-TII-30-ITAT-Mum-TP – the taxpayer claimed that Octroi expenses should be excluded while computing margins on the ground that comparables did not incur such expense. The ITAT upheld the claim.

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