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 taxpayers may capitalise certain expenditure based on accounting policy.  The operating margins are generally computed considering revenue items. An issue came up before the Courts that whether expenditure capitalised by the comparables can be considered as operating or non-operating in nature.

ThyssenKrupp Industries India Private Limited v Addl CIT (2013) 154 TTJ 0689, [2013] 33 taxmann.com 107 (Mum-Trib) – While computing the margin of some of the comparables, the taxpayer contended that expenditure capitalised is to be considered as operating in nature.  The ITAT held that in no sense expenditure capitalised can be considered as operating in nature.

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