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To compute net operating profit under TNMM for determining PLI of comparable company, non-operating incomes and non-operating expenses should be excluded.
Facts:
The taxpayer was a tax resident of India and a membercompany of Exxon Mobil Group engaged in oil and gas industry globally. The taxpayer was engaged in the activity of conducting market survey and performing related advisory services to its AEs. In respect of the relevant tax year, the taxpayer had reported four international transactions out of which one of the transactions pertaining to ‘conducting market survey activities and related advisory services’ was disputed by the TPO. To demonstrate the ALP of this transaction, the taxpayer had adopted TNMM as the most appropriate method and Operating Profit to Total Cost (OP/TC) as the Profit Level Indicator (PLI) and had selected twelve companies as comparable. By adopting multiple year data of these companies, the taxpayer computed average OP margin at 4.46% and showed its international transaction was at ALP.
The TPO rejected use of multiple year data and used only current year data. Since current year data for four companies was not available, TPO used only eight companies and computed OP/TC margin at 17.96%.
In respect of one of the companies, the profit margin was 37.14% whereas, according to the taxpayer, the correct OP/TC margin was 6.98% after excluding “other income”.
Held:
Major component of other income of the comparable company was interest income. TNMM contemplates using OP to a suitable base and to determine OP items of non-operating income should be excluded.
If non-operating income is to be excluded, non-operating expenses should also be excluded. Hence, the tribunal remanded the matter to AO/TPO for correct determination of OP/TC of the comparable company after excluding non-operating income as well as nonoperating expenses.
