Tribunal upholds taxpayer's contention of exclusion of indirect expenses for margin computation; verify data before considering a company as a comparable.

Facts of the case

Swarovski India Pvt. Ltd. ("the taxpayer") is a wholly owned subsidiary of Swarovski International Holdings AG (FIH) which is globally famous for its Crystal and related products. The taxpayer is operating as a 100% EOU in Pune and engaged in job work coating raw material beads and polishing the sale to its associated enterprises ("AEs") and domestic unit operating in New Delhi carried out import and sale of crystal and related products.

During the year under consideration, the taxpayer, being the sole distributer of the products of its AEs in India, sold goods manufactured by its AEs to the customers. For benchmarking its international transaction pertaining to "purchase of consumables and job work charges received", the taxpayer selected Cost Plus Method ("CPM") and computed gross mark-up at 120.94% which was re-computed by the transfer pricing officer ("TPO") by including certain other indirect expenses in the cost base. The TPO also excluded two comparables out of 19 comparables selected by the taxpayer due to unavailability of data. Based thereon, the TPO made an upward adjustment of INR 1.50 crores. Aggrieved with the same, the taxpayer filed an before the CIT(A) who set aside the additions made by TPO and grated relief to the taxpayer. Aggrieved by the same, the Revenue appealed before the Income Tax Appellate Tribunal ("the Tribunal").

Tribunal's Ruling

1. On treating the expenses not directly attributable

The Tribunal confirmed the findings of CIT(A)'s exclusion of certain expenses (i.e. depreciation, repairs and maintenance, electricity and insurance) which could not be directly linked with the taxpayer's distribution activity while computing the gross profit mark-up for applying CPM. For the sake of the same, the Tribunal relied on the provisions of Rule 10B of the Income Tax Rules, 1962.

Nangia's Take

The given ruling clearly provides to consider the expenses (especially while computing the gross profit) which can have a direct nexus with or can be directly attributable to the taxpayer's business activities of production and distribution. The expenses like clearing charges, for-ex fluctuation etc. cannot be considered to have a nexus with cost production while computing the gross profit margin.

Source: Swarovski India Pvt Ltd Vs. DCIT [TS-705-ITAT-2016(Del)-TP]

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