Transfer Pricing: In computing ALP, interest & abnormal costs to be excluded

Marubeni India Pvt. Ltd vs. DIT (Delhi High Court)

The assessee rendered marketing support services to its foreign AE for which it earned a commission. The assessee claimed that in determining the ALP, the interest earned by it on short-term deposits arose from a core treasury function and had to be included in the operating profit and the expenses incurred by it on closure of business were ‘abnormal’ and had to be excluded from the operating profit. The TPO, CIT(A) and Tribunal (144 TTJ 474) rejected the assessee’s contention. On appeal by the assessee to the High Court, HELD:



(i) The question whether a particular activity of the assessee such as the interest generating activity should be taken into consideration in the determination of the ALP is a question which needs to be decided considering the nature of the business of the assessee and its’ “business model”. The Tribunal rightly held that as the earning of interest income was only the result of investment of surplus funds and was not a primary income-generating activity, the interest income had to be excluded from the “operating profit” for purposes of determination of ALP;



(ii) It is not possible to lay down a formula that would be applicable universally to determine whether a particular expenditure or cost incurred by the assessee is a normal or abnormal item of expense in cases relating to transfer pricing. If the assessee is compensated for its service on the basis of cost plus 10%, the question may arise as to whether the compensation paid for closure of the Indian units can be considered to be normal or abnormal cost, because the compensation would directly depend or vary according to the quantum of the costs. But if the assessee is being compensated by a fee or commission which has no connection with the costs incurred, such costs would be treated as abnormal. On facts, as the assessee was being compensated by way of a commission of fees by the AE and not on cost plus basis, the compensation paid in connection with the closure of the Indian units represents abnormal costs which have to be excluded for determining the ALP.