The Delhi High Court while dismissing the appeal of the income tax department upheld the order passed by the Income Tax Appellate Tribunal (ITAT) which allowed the customs-duty adjustment on import of watches.
The dispute essentially is in respect of the adjustments which were made bearing in mind the variance in the custom duties which were borne by the comparables of the respondent-assessee.
Facts
It was also brought to the notice of the first appellate authority that besides the differences, there are significant differences in terms of taxes, duties, etc. levied in the Indian market vis a vis Italy on the import of luxury watches, which result in significant bearing on the gross and operating margins of the Indian companies engaged in resale of imported luxury watches in India.
After considering the facts and submissions and referring to Rule 10B(2) of the Income Tax Rules and also referring to the OECD TP Guidelines for Multinationals and Tax Administrators, the CIT(A) observed that use of foreign comparables is appropriate in light of the lack of information on comparables dealing in luxury watches in the year under consideration.
However, the CIT(A) observed that although the use of foreign comparables has been agreed, but it is essential to undertake reasonable adjustments to establish comparability between the foreign comparables used and the assessee. One of the adjustments, related to customs duty. The CIT(A) opined that the TPO while selecting the foreign comparables did not consider the differences in custom duty rate prevalent in lndia vis a vis Italy.
The first appellate authority observed that the high custom duty rates on luxury watches in lndia accounted for 32.37% of the net sales of the assessee and custom duty paid by the assessee on the import of watches and spares was above 50% of the total cost of goods sold.
The CIT(A) held that high custom duty rates in lndia are bound to have significant bearing on the gross margins as well as operating margins of the assessee vis a vis Italian comparables.
The CIT(A) was convinced that high cost of importing goods into lndia should be adjusted for, since the foreign comparables operating in Italy enjoy the benefit of NIL or negligible customs duty and do not have to spend the same proportion of import duty cost as the assessee.
Hence, in view of the provision of Rule 10B(2)(d) and 10B(3) of the Rules, appropriate adjustments for differences on account of geographical location, size of market, level of competition, government regulations is called for and the CIT(A) accordingly, held that reasonable quantitative adjustments should be made in order to make a comparison of the profitability of the assessee vis a vis the comparable companies and computed the gross margin.
The Tribunal has accepted the adjustments which were made on account of difference in the rates of custom duties which were borne by comparables and the assessee.
Conclusion
The court noted that the differentiations would have clearly merited consideration bearing in mind the language of clause (d) of Rule 10B(2) of Income Tax Rules, 1962 which states that the comparability of an international transaction or a specified domestic transaction with an uncontrolled transaction shall be judged with reference to the conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
The court dismissed department’s appeal.
Case Details
Case Title: The Pr. Commissioner Of Income Tax V/S Swatch Group (India) Pvt. Ltd.
Citation: ITA 398/2024
Judges: Justice Yashwant Varma And Justice Ravinder Dudeja
Counsel for the Appellant: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, JSC & Mr. Pratyaksh Gupta, JSC
Date of Order / Judgment: 30/07/2024
