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. 

In case of taxpayers who are captive centre’s entire services are rendered to the AEs.  The expansion plan is also generally driven by the AE.  In such circumstances, when the taxpayer incurs any additional expenditure like taking new premises on rent at the behest of the AE, should the taxpayer be compensated for such extra cost even if such expense is extra-ordinary or abnormal in nature. The Courts in the following decision has dealt with the issue.

ITO v CRM Services India (P) Ltd [2011] 14 96 (Del), [2011] 48 SOT 41 (Del)(URO)


The taxpayer was engaged in the business of providing call centre services to its AE. The taxpayer had adopted TNMM as the MAM.  The TPO conducted fresh search and made TP adjustment.

While computing the margin, the taxpayer had treated rent paid for new building premises as non-operating in nature.  Taxpayer’s AE in USA was awarded a contract by IBM.  Part of project was planned to be performed by taxpayer in India.  Additional capacity in terms of infrastructure and human resource was created by the taxpayer. However, IBM later decided not to award the contract to AE. IBM paid compensation for direct set up expenses.  Taxpayer’s all initial set up costs were reimbursed. However, rent for lock in period (36 months) paid in respect of new premises was not recovered from IBM/AE.  This rental expense was taken as extra-ordinary expense and was excluded from operating cost of the taxpayer while computing the ratio of operating cost/operating profit. The TPO rejected taxpayer’s claim for extraordinary expenditure. The TPO was of the view that these expenses were that of the AE and AE should have borne it.

The CIT(A) accepted the contention of the taxpayer and excluded the cost from operating cost.  The Revenue filed appeal before the ITAT.


Based on the facts of the case, the ITAT observed that the taxpayer had no marketing responsibility. The ITAT held that held that the additional capacity was created by the taxpayer only at AE’s behest.  Therefore, the ITAT concluded that the expenditure, in case of frustration of IBM Sprint contract, should have been borne by the AE.  The disallowance of adjustment in respect of extraordinary expenses by the TPO was upheld by the ITAT. However, the ITAT upheld taxpayer’s alternate contention for adjustment in respect of capacity under-utilisation and remanded the matter back to the AO.

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