Company can claim expense deduction paid to its unit: ITAT

MUMBAI: Providing relief to scores of multinational companies locked in transfer pricing disputes with income tax authorities, a tribunal has clarified that a company can claim deduction of expenses paid to a subsidiary if it follows a global cost allocation policy. The Delhi bench of the Income Tax Appellate Tribunal, in a dispute between British Gas and Indian tax authorities, said if a global cost allocation policy exists, it cannot be denied services were not rendered. BG International Ltd had filed income tax returns for assessment year 2010-11, in which it deducted expenditure of Rs 97.28 crore paid to its Indian subsidiary from a profit of Rs 97.28 crore, resulting in nil earnings and no tax.

The income tax department served a notice to BG International challenging the return. The company explained, “The transaction between assessee and BG Exploration & Production India Ltd was in the nature of reimbursement of the actual cost and devoid of any element of profit.” ITAT held that the income of BGEPIL, the Indian subsidiary, should be computed in terms of section 44BB of the Income-Tax Act, 1961, which mandates that income from provision of services and facilities in connection with the mineral oil business in India will be computed by applying a deemed profit rate of 10 per cent of gross receipts.