Saturday, January 15, 2011

PASS-THROUGH COSTS (PAID TO THIRD PARTY VENDORS) NOT TO BE INCLUDED IN COST BASE FOR DETERMINING NET PROFIT MARGIN FOR TRANSFER PRICING PURPOSES

The ITAT Delhi held where a taxpayer engaged in rendering advertising and related services to its
Associated Enterprises (AEs) is also acting as an intermediary between the AEs and the third party
vendor to rent advertisement space from the vendor, costs recovered by the taxpayer from the
AEs for such renting and then passed on to the vendors (pass-through costs) would not be value
adding costs for the taxpayer and would, therefore, not be taken into account for computing net profit
margin (Operating Profit / Total Cost) of the taxpayer for applying the Transactional Net Margin
Method (TNMM).

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