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TMI Blog2025 (4) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... t to India project office without appreciating the matter to the ld. TPO. 3. The brief facts are that assessee i.e. Fincantieri Spa is a company registered under the laws and is a tax resident of Italy. It is engaged in the business of designing and construction of complex ships with high technological content such as merchant and naval vessels, offshore and mega yachts shipbuilding. It has entered into an agreement dated 07/07/2015 with Mazagon Dock Shipbuilders Limited (MDL), an Indian shipyard controlled by the Ministry of Defense for services as know-how provider for Technology upgradation and capability enhancement for facilitating integrated construction of ships for the Indian Navy. To implement the agreement assessee has set up a project office (PO) in India on 21/09/2017 to provide required local support in connection with the said project. Thus, it is not in dispute that this project office is a permanent establishment (PE) in India during the relevant assessment year as per Article 5 of India-Italy DTAA which includes fixed place of business. In the return of income assessee had declared total income of Rs. 84,42,61,546/-. During the year assessee had received Rs. 95,25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n attributed to such PE and in support reliance was placed on the judgment of Hon'ble Supreme Court in the case of Director of Income-tax (International Taxation) vs. Morgan Stanley & Co. reported in 292 ITR 416 and the judgment of Ishikawajma-Harima Heavy Industries Ltd. vs. Director of Income-tax reported in 158 Taxman 259 (SC). Thus, it was stated that income of Rs. 82,39,71,604/- pertaining to services directly performed by the head office is not attributable to project office in India and it cannot be taxed @40% plus applicable charges and cess. 5. However, the ld. AO rejected the assessee's contention and held that PE did not play limited role in the project and had other major role also, therefore, income attributed to the project office is not acceptable. Without carrying out any ALP determination, he attributed income to the project office on adhoc basis of 50% of the total receipts as attributable to PE and no deduction of expenditure incurred for earning such income was allowed by the ld. AO. The ld. DRP has also confirmed the action of the ld.AO and finally the difference between the income shown by the assessee in the return of income and attribution made by the ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied to provide the deliverables envisaged under the contract with MDL and simply acted as liaison between assessee and MDL. He further submitted that ld. AO without referring to the activities required to be performed by the assessee under the contract or by the project office has made an adhoc attribution to the PE, it is not only unreasonable but also against principle of arm's length principle which is embedded by attributing the profit of the PE. 8. Thereafter, our attention was also drawn to the terms and conditions of the contract under the agreement and the key allocation of work under the contract and submissions qua the terms of contract is as under:- Particulars Details and submission Name of the contract Services as Know-how Provider for Technology Upgradation and Capability Enhancement for Facilitating Integrated Construction of Project 17A Ships. The name in itself depicts the essence of the contract that the Appellant has been engaged as a know-how provider for construction of ships for Indian Navy - 4 at Mumbai site and 3 at Kolkata site. Meaning of Integrated construction Methodology facilitating extensive pre-outfitting so as to realize a significant redu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iverables sent to MDL, 'Register of File Transfer' (ROFT) is maintained and submitted with the Italian Government. Airwaybills and proforma invoice evidencing the transfer of deliverables from Italy to India are also submitted. Contract price The contract price is a lumpsum amount of Euros 40 million for the agreed deliverables. Additional clauses covering man day rates are also provided for any additional services that the customer may require Taxes to be borne by All taxes arising in respect of the subject contract outside India are to be borne by FC whereas all taxes arising in India are to be borne by MDL 9. Thus, he submitted that on conjoint reading of the above and it is also evident from the contract, it is clear that deliverables are prepared in Italy on the basis of inputs from MDL and then delivered to India through SDE or in hard copy into relevant documentation have been maintained. Apart from that, for the required on-site support, assessee has set up the project office in India and during the year only eight employees were deputed to the project office to provide the necessary technical on-site assistance under the contract. Out of 8 employees, 3 work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of employees of HO and PO is irrelevant as these rates are in relation to service to be provided on requirement basis post completion of the contract The learned AO has incorrectly understood such rates to be the man day rates at which the employees of FC are currently paid. The said rates are for future employees who may or may not be required to be deputed to India based on MDL's requirement post completion of contract Further, 5 to 6 years of experience cannot be considered as highly experienced Also, the employees are only graduates. The contention that few employees can complete half of the contract is incorrect. They are only providing minimal on-site assistance to MDL to understand the deliverables under the contract Employees in India regularly assist and represent M/s Fincantieri to MDL and shares feedback report of the project which helped HO branch to deliver the services Employees from Italy other than placed in the project office also visited India and used to interact with employees of MDL and employees of PE in India. Even, it is admitted fact that they were staying with the employees of PE in India. Therefore, the submission of the assessee that PE has lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of inputs from MDL. For example, refer deliverable no. 23 - Deliverables pertaining to Aviation on page 437 (first row of the table captured) of the Paper book. This is a drawing document (refer page 407 of the paper book) which can be developed only in Italy since the Appellant does not have the relevant systems, software and manpower in India. The Learned AO has also accepted the fact that the designs are developed in Italy - refer below point. Further, from para 63.1 on page no. 392 of the Paper book it is evident that responsibility to provide the relevant data for this deliverable is of MDL, Similarly, for all deliverables completed during the year, your Honours would appreciate that MDL is only responsible for providing inputs to the Appellant and the role of project office is very limited. As seen from the agreement, the contract is for technical knowhow and design of ship building which is very specialized field. It is admitted fact that designs were prepared in Italy and sent to India for its execution by employees of PE. The employees deputed at the project site used to understand the designs and technology involved in it and " the same. Hence, the employees deputed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice in Italy cannot be attributed to the project in India. 12. On the other hand ld. DR strongly relying upon the order of the ld. AO and ld. DRP, had reiterated the contentions of the ld. AO which has been reproduced above. 13. We have heard rival submissions and also perused the relevant finding given in the impugned orders as well as various materials referred to before us. The only issue involved is whether ld. AO was correct in contributing 50% of the gross receipts to the branch office i.e. PE @50% which was on adhoc basis without carrying out in arm's length determination. 14. It is not in dispute that assessee is providing services as a know-how provider for technology upgradation and capability enhancement for construction of ships for Indian Navy by Mazagon Dock Shipbuilders Limited (MDL). As per the contract the assessee was to provide MDL with know-how to build ships in a given time frame. MDL has signed a contract with Ministry of Defense, Government of India for construction of seven ships and accordingly, the responsibility to contract ship was purely of MDL. The MDL entered into an agreement with the assessee to render the technical services for providing design ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From the perusal of the TP study report, it is seen that following FAR analysis have been taken into consideration which are being summarized by us in the following manner in the table given below:- Type of Functions Fincantieri HO (Italy) Fincantieri PO (India) Bidding for contract (including Pre-bidding) Yes No Contracting with customers Yes No Strategy and planning for contract execution Yes No Build strategy and build plan Yes Limited Design and production drawings Yes Limited to explain drawings Project management and supervision Yes Limited 17. The summary of key activities performed by the Head Office in Italy and project office in India specific to the sub-contract is highlighted herein below:- Particulars Activities performed by HO Activities performed by PO Build strategy and build plan * Undertaking audit of existing infrastructure facilities. * Preparation of an infrastructural & capability study and gap analysis. * Preparation of a build strategy for customers Assisting HO in undertaking minimal audit activities under the supervision and guidance of HO Preparation of designs and production drawings * Preparation of detailed designs as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neers Limited 15.20% 9 Satyam Venture Engineering Services Private Limited 15.83% 10 DRA Consultants Limited 19.36% 11 Mahindra Consulting Engineers Limited 21.60% 12 Consulting Engineers Group Limited 23.85% Arm's Length Range 5 35th percentile 5.31% 6&7 Median 8.31% 8 65th percentile 15.20% 21. Since the operating margin by the PO was 19.36% which was higher than the arm's length range of the margins of the comparable companies, the international transaction pertaining to provision of technical consultancy services between PO and HO has been stated to be at arm's length on the basis of Indian transfer pricing regulations. This ALP has neither been rebutted nor has been considered by the ld. AO nor was any reference made to the ld. TPO. The AO while attributing profit of PE was required to carry on FAR analysis to allocate profit or income to the PE. The arm's length principle is embedded in Article 7, when income or profit is to be attributed to the PE after examining the role and function of the Foreign Enterprise (FE) through PE; assets deployed to the PE for carrying out the activity and risk assumed by the PE in performing the funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities carried out by Italy that most of the deliverables were only from Italy, cannot make further attribution for the production of technical or consultancy services. Accordingly, the attribution made by the ld. AO is rejected. 25. As regards various presumptions made by the ld. AO, we had gone through the rebuttals and the explanation of the assessee and we are in agreement with such an explanation that observations of the ld. AO and the contentions raised by him cannot stand. Accordingly, the addition made by the ld. AO for making adhoc attribution with the PE is deleted. 26. Since we have deleted the addition, there is no requirement to deal with other grounds, however, for the sake of completeness, the issue whether computation of income attributable to PE can be made without referring the matter to the ld. TPO is discussed in brief. The stand of the ld. DRP is that ld. AO is not empowered to refer the matter to the ld. TPO for determination of arm's length price in the present case. According to the ld. DRP in the case of apportionment of revenue between PO and HO which is based on examination of functions, asset and risk undertaken by PO and HO and such examination of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to the Special Bench of the ITAT was:- - Whether transactions between a foreign enterprise outside India and its Indian permanent establishment (PE) can be considered as international transactions for the purpose of section 92B of the Income-tax Act, 1961, and accordingly, can be subjected to the 'arm's length price' (ALP) adjustment. - The Special Bench answered the question in the affirmative, in favour of the revenue. The Bench concluded that the transaction between a foreign enterprise and its PE in India can indeed be considered as an international transaction and be subject to ALP adjustment. The underlying philosophy of transfer pricing provisions and Article 7(2) of the India-China Double Taxation Avoidance Agreement (DTAA) is the same, wherein both try to analyze how third parties would have dealt with each other under uncontrolled conditions. Therefore, the contention that there is a conflict between Article 9 of the DTAA and domestic transfer pricing provisions was rejected. 28. Thus, we hold that attribution of revenue between PO and HO is an international transaction which is subject to TP regulations which here in this case has been duly compl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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