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 Court had to consider whether one time joining bonus paid by the taxpayer can be considered as extra-ordinary expense and therefore non-operating in nature.

M/s. Aris Global Software Pvt Ltd v DCIT (IT(TP)A NO.1037/Bang/2011) – The taxpayer was new entrant in the software business. It hired 77 employees to scale up operations. To hire such a big number of employees, the taxpayer paid substantial amount as joining bonus to the employees. The taxpayer claimed that this is not a regular phenomenon and should be considered as extra-ordinary expense. Therefore, it was contended that same should be treated as non-operating in nature and excluded from operating cost.  The ITAT held that one time joining bonus is to be treated as non-operating in nature. The ITAT observed that said amount is paid before the employees join the company and is extraordinary expense.

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