Mori Seiki Co. Ltd. ["the taxpayer"/ "the
HO"], operating as a Branch office of Mori Seiki- Japan in
India ["India BO"], is primarily engaged in selling
machine tools manufactured by the HO in India. During the
assessment year under review, the taxpayer provided marketing,
sales, post sales, technical and consumer support services to the
dealer network of its associated enterprise ["AE/ the
HO"] and benchmarked the same by applying Transactional Net
Margin Method ["TNMM"].
During assessment proceedings, the assessment officer
["AO"], by relying the terms of the agreement between the
HO and its India BO held that the India BO is not only involved in
selling of machines manufactured by the HO in India but also
participates in determination of price of machines with the HO and
thus, is exposed certain crucial business risks. Based on
functional, assets and risk ["FAR"] analysis of the India
BO and, the AO concluded that the taxpayer constituted a Permanent
Establishment ["PE"] and accordingly, by applying the
provisions of Rule 10(ii) of Income-tax Rules, 1962, attributed 50%
of the gross profit arising from the sales generated from
Further, in relation to receipt of commission by India BO from
the HO for provision of aforesaid services, the AO, on the ground
that since no efforts were made by taxpayer to carry out any FAR
analysis, determined the arm's length price ["ALP"]
by applying TNMM using operating margin of comparables at 20% and
accordingly made further addition of INR 21.50 lakhs.
The aggrieved taxpayer filed an appeal before the Commissioner
of Income tax (Appeals) ["CIT(A)"] who restricted the
addition made by the AO amounting to INR 1.42 Cr. to INR 54 lakhs
by rejecting AO's simultaneous application of TNMM and Profit
Split Method ["PSM"] for the attribution of gross profit
at 50:50 ratio for the same international transaction. The same is
not permitted in law either. Aggrieved Revenue authority filed an
appeal before the Income Tax Appellant Tribunal ["the
ITAT"/ "the Tribunal"].
The ITAT's Adjudication
On application of TNMM in
The ITAT was in consonance with the CIT(A) in holding that in
subsequent year, the Dispute Resolution Panel has considered
applied TNMM using Net Cost Plus Margin ["NCPM"] of 5.60%
while the taxpayer computed the NCPM of 5.84% for benchmarking
similar transaction during the year under review. The ITAT opined
that the since the facts during the year under consideration are
similar to the facts in the subsequent year on account of identical
FAR, therefore, the CIT(A) has rightly applied the NCPM of 5.84% to
work out the ALP adjustment.
On using TNMM and PSM for the
same international transaction
The ITAT held that CIT(A) was justified in rejecting the approach
of the AO of accepting TNMM and also using PSM for attribution of
profit on international transaction at 50:50 ratio on the grounds
that either of the two methods could be used and not both for
benchmarking the transaction under review. The Tribunal also
observed that the lower authorities failed to appreciate the fact
that when once the transaction benchmarked under the provisions of
Section 92 of the Income Tax Act, 1961 is approved, then there is
no need to attribute the profits separately to the taxpayer's
PE. In the light of the same, the Tribunal dismissed the appeal of
the Revenue and concluded that CIT(A) is justified in restricting
the adjustment to INR 54 lakhs.
The instant case underlines the fact that the Indian
TP legislation does not provide for the simultaneous application of
two TP methodologies when through one method the taxpayer
reasonably justifies the arm's length nature of its
international transaction. Additionally, it is also pertinent to
note that once the transaction undertaken by a Indian PE of a
foreign entity appropriately meets the ALP criteria then the
question of attributing the profit in India for the same
transactions separately does not arise.
Source: DCIT Vs. Mori Seiki Co Ltd
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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