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
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
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
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
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