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 may have to relocate its premises due to various business reasons.  Due to such relocation, the taxpayer may have to incur additional expenses. Further due to such relocation the normal business activities of the taxpayer may also be hindered.  

The issue that arises for consideration is whether such relocation expenses are to be considered as operating or non-operating in nature.  Further, another issue that arises is whether adjustment can be made for loss of or under utilisation of capacity due to shifting of office/premises.  These issues are dealt by the Courts in the following cases:

Transwitch India (P.) Ltd. v DCIT (2013) 151 TTJ 0177, [2012] 21 257 (Del), [2012] 53 SOT 151 (Del) – The taxpayer is a captive unit rendering design and development of software services to its AE.  The TPO made a transfer pricing addition to the taxpayer’s income. Before the TPO, the taxpayer had sought an adjustment towards relocation expenses, which was rejected by the TPO.

Before the ITAT, the taxpayer contended that the office relocation expenses, additional payment of two months’ rent for new office and salary paid for unproductive/idle hours should be excluded while computing its operating cost.  The taxpayer argued that it could not carry out normal operations due to relocation of its office premises. The employees of the taxpayer were idle and unproductive during March 2006 as the new office commenced normal operations towards end of March.  The unproductive costs were not billed to the parent company and resulted in reduced revenue during the financial year.

The ITAT observed that the Municipal Corporation of Delhi (MCD) had undertaken a sealing drive, due to which the taxpayer had to shift to new premises.  The TPO had denied the adjustments, holding that the taxpayer’s office premises were not actually sealed by MCD and that the taxpayer had not provided the copy of MCD notices ordering its offices premises to be shut down.  The ITAT held that the taxpayer had decided to shift its office premises to a commercial area and in the process incurred the aforesaid abnormal expenses. Hence, the rejection of taxpayer’s claim on the ground that its premises were not actually sealed was unjustified and unfounded.

The TPO had observed that the nature of the taxpayer’s business was such that shifting of the business from one premises to another could be effected over a weekend, without causing disruption. The ITAT rejected this argument, holding that dismantling and re-installation of necessary equipments and devices (such as computer systems, servers, storage devices, etc) at the new premises required considerable time and technical skills.

The taxpayer had placed on record its quarterly capacity utilisation statement, demonstrating the fall in its capacity utilisation. Further, the fact that the taxpayer had to shift its office premises at a very short notice, sufficiently substantiated the low capacity utilisation of the taxpayer during the last quarter of FY 2005-06.

The ITAT therefore allowed the adjustment for relocation expenses.

Brigade Global Services (P.) Ltd v ITO [2013] 33 618 (Hyd-Trib.) – the taxpayer contended that excessive rent incurred on account of shifting of office be excluded for computing ALP. The ITAT held that the taxpayer had incurred excessive rent of Rs 1,41,20,250 on account of keeping the premises idle in view of proposed shifting of the office premises. The ITAT directed the AO to make necessary adjustments towards such rent and treat it as non-operating in nature.

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