Indirect expenses can be excluded for margin computation: ITAT

MUMBAI: In a recent development Income Tax Appellate Tribunal (ITAT) has upheld a taxpayer’s contention of excluding indirect expenses for calculating profit margins. The ITAT also asked the tax department to verify data before considering a company as a comparable.

Swarovski India private limited (taxpayer), a fully owned subsidiary of Swarovski International, was engaged in job work and helping with the sale to its associated enterprises (AE).

The company also carried out import and sale of crystal and related product. The company for benchmarking its international transactions pertaining to purchase of consumables and job work charges received selected cost plus method (CPM) and computed gross mark-ups at 120. The tax officers took a different view however. Around 94% of which was recomputed by the transfer pricing offer by including certain other indirect expenses in the cost.

The transfer pricing officer also excluded two comparable out of the 19 selected by the company due to “unavailability of data.” Thereafter tax department demanded a tax of Rs 1.5 crore. The company challenged this with CIT (A) and managed to get a favourable outcome. The revenue department appealed before the ITAT.

The ITAT confirmed the findings of CIT (A) that exclusion of certain expenses like depreciation, repairs and maintenance could not be directly linked with the taxpayer’s distribution activity while computing the gross profit mark for applying CPM.

“For the sake of the same the ITAT relied on the provisions of rule 10 B of the income Tax rules 1962. The given ruling clearly provides to consider the expenses which can have a direct nexus with or can be directly attributable to the taxpayer’s business activities of production and distribution,” Rakesh Nangia, managing partner, Nangia & Co, a tax consultancy said.