Appeal details
Counselvise Citation
[2025] 140 COUNSELVISE.COM (IT) 21094 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-03-2025
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
I
Assessment Year
2020-2021
Judgement Text
" IN THE INCOME TAX APPELLATE TRIBUNAL, ‘I’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER ITA No.3313/Mum/2023 (Assessment Year :2020-21) Fincantieri SPA Italiani SPA Trieste (TS) Via Genova, 1 CAP-94121, Italy Vs. The Assistant Commissioner of Income Tax, INT Tax Circle 2(3)(1), Mumbai PAN/GIR No.AABCF6158L (Appellant) .. (Respondent) Assessee by Shri Nikhil Tiwari Revenue by Shri Vivek Perampurna,CIT DR Date of Hearing 05/03/2025 Date of Pronouncement 28/03/2025 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against final assessment order dated 20/07/2023 passed by the AO u/s. 143(3) r.w.s. 144C(13) for the A.Y.2020-21 in pursuance of directions given by the DRP dated 28/06/2023. 2. In various grounds of appeal, assessee has challenged the action of the AO in attributing provision for fees and technical services income (receipts) of Rs.34,77,09,246/- to the project office of the assessee, i.e., permanent establishment; and ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 2 secondly, even ld. DRP have erred in not appreciating the concept of profit attribution to PE is in the nature of international transaction requiring arm’s length analysis and thereby exceeding their power in attributing additional impugned amount 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.95,25,24,717/-, ot of which, Rs.12,85,53,113/- was attributed to PE at arm’s length which was on the basis of detailed transfer pricing study report and the balance Rs.82,39,71,604/- was attributed to the head ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 3 office i.e. the assessee. In respect of income of Rs.12,85,53,113/- attributed to the PE, income of Rs.2,02,89,942/- was computed after considering the deduction of expenses and was offered to tax in the hands of PE @43.68% in accordance with Section 44DA of the Act. Balance income of Rs.82,39,71,604/- attributable to the head office which was offered to tax @10.92% as fees for technical services u/s.115A of the Act. In this manner, the total income declared in the return of income for A.Y.2020-21 worked out to Rs.84,42,61,546/-. 4. During the course of assessment proceedings in response to notices issued by the ld. AO assessee submitted the details of project works contract executed by the assessee in India during relevant F.Y.2019-20 alongwith detailed explanation and bifurcation of income as income attributable to its project office (PO) and fees for technical services (FTS) and also copy of transfer pricing study report was also submitted. The ld. AO had also required the assessee to provide detailed working alongwith supporting documents for the income attributable to project office, and in response assessee submitted that income attributable to project office in India u/s.44DA has been calculated at arm’s length principle pursuant to transfer pricing study for the relevant year. Apart from that, assessee had submitted the details of activities undertaken under the contract with MDL. Further, assessee had also submitted in response to the specific query by the ld. AO to submit the role of head office and branch office in aligning the milestones under the contract with MDL. Copy of work completion certificate received from ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 4 MDL was submitted wherein all the activities undertaken by the head office is also provided. In so far as assessee’s response to the ld. AO’s notice to substantiate the attribution of income and as to how the income of head office is not attributable to the PE, assessee submitted detailed nature of activities alongwith involvement of head office and the project office for each of the activities. It was specifically submitted that once attribution of income to the PE had been determined at arm’s length then no further income can 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 ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 5 shown by the assessee in the return of income and attribution made by the ld. AO in his final assessment order is as under:- Particulars As per return of income As per Assessment Order Total receipts pertaining to work performed in FY 2019-20 (a) 95,25,24,717 95,25,24,717 Receipts attributed to PE (b)* 12,85,53,113 47,62,62,359 Less: Expenses incurred by PE (c) 10.83,28,793 10,83,28,793 Corresponding income of PE offered to tax (d)=(b)-(c) 2,02,89,942 36,79,99,188 Receipts (Income) attributed to HO (e) = (a) - (b) 82,39,71,604 47,62,62,359 Total income (f)=(d)+(e) (rounded off u/s 288A of the Act) 84,42,61,550 84,42,61,550 6. Before us ld. Counsel vehemently objected to the adhoc attribution of income to the PE and drew our attention to the activities performed by head office and the activities performed by the project office for the contract with MDL which was given before the ld. AO and same is also reproduced hereunder:- Particulars Activities performed by HO Activities performed by PO ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 6 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 per the inputs provided by customers, formats, assembly production drawings etc. No role Project Management and Supervision Interacting with customer and coordinating with various internal departments Ensuring that timelines are met, tracking Monitoring costs incurred No role Technical assistance Supervising employees of PO involved in providing on premise technical assistance Providing requisite onsite technical assistance in understanding certain specific nuances of the drawings and designs, providing technical support required by customer in construction of ships Quality assurance Performing adequate equality checks, test procedures and inspection, as necessary, for the activities performed by employees of project office in India No role ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 7 7. Thus, Ld. Counsel submitted that the activities of the project office were only to the limited extent and the significant portion of the contract has been undertaken by the assessee in Italy. Further, the employees deployed to the project office in India are not qualified 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 reduction in the overall build period. Accordingly, the purpose of the contract is to assist MDL with know-how to build ships in a reduced timeframe. Responsibility MDL has signed contract with the Ministry of Defence, ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 8 to construct ships Government of India for construction of 7 ships. Accordingly, the responsibility to construct ships is of MDL Inputs required by FC HO for providing the services On signing of the contract, the customers are to provide with the list of inputs as requested Detailed listing of inputs to be provided by MDL to the Appellant to render the services are also captured in the contract basis which it is evident that the necessary inputs are provided by MDL Copy of inputs received by the Appellant from MDL on a sample basis are also submitted Audit of MDL Facilities The personnel of the Appellant conducted audit on the premises of MDL in initial phases of the subject contract. Under the contract, the Appellant is to suggest only minor improvements in the infrastructure while process innovation techniques are only to be suggested in detail. Thus, the major role of the Appellant is to suggest necessary improvements in the processes followed by MDL with a view to reduce the build process for ships. Deliverables under the contract Basis the detailed listing of deliverables under the contract, your Honours would note that the majority of the deliverables are either 'Design/ Drawings' or a 'Review report' which are prepared by the Appellant in Italy basis the inputs from MDL. While the Appellant, under the contract, has also undertaken to provide technical assistance to MDL and trainings to MDL employees, the crux of the contract remains to be the design documents developed by the Appellant in Italy basis the inputs from MDL. This fact is also affirmed by the customer MDL, a Government of India undertaking vide its letter dated 17 October 2022 which in fact stated that all deliverables under the contract are prepared by the Appellant in Italy. ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 9 Delivery of Deliverables The delivery of the deliverables under the contract, being for the benefit of the Indian Navy which is a matter of Defense, is made through the secured data exchange (SDE) set up for this purpose. The Appellant is also subject to its resident country i.e. Italy's regulations in this regard and accordingly, in respect of the deliverables 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 worked on the site in Kolkata and 5 on the site in Mumbai. Based on these deliverables and the basis the payment milestones agreed, the ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 10 assessee had received Rs. 95,25,24,717 (on grossed up basis), out of which Rs.12,85,53,113 being attributed to PE on an arm's length basis after deduction of expenses as per section 44DA and balance as income of the head office as FTS. 10. Thereafter, ld. Counsel has given rebuttals against various observations and the presumptions made by the ld. AO wherein multiple contentions have been raised by the ld. AO regarding receipt of PO under the contract. The contention of the ld. AO and the rebuttal of the assessee qua every observation are reproduced hereunder:- Contentions of the learned AO Appellant's remarks The Assessee attempted to shift the major activities in the hand of HO and considered limited role for Project office in India As captured at para 12 to 14 and para 19 above, your Honours would appreciate that the arrangement and deliverables under the contract is such that the major deliverables are completed outside India in Italy basis inputs from MDL. And PO's role is restricted to on-shore support. However, the learned AO without any supporting, made the statement that the Appellant tried to shift major activities to HO which does not represent the facts of the case. It is seen from the above that employees deputed to India are highly qualified graduates and having experience of 5 to 6 years in their role. Also, seen from copy of agreement they are paid well in India (Euro 1675 per man day in India as The man day rates mentioned in the contract are in respect of services that may be needed by MDL post completion of the contract, Further, such rates are agreed at which FC would charge MDL in case such services are availed by MDL in the future. Accordingly, the said rates are ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 11 compared to Euro 879 in Italy). As can be seen from above, all are specialist in their role and performing specialized work If only assistance work was being provided by the PE office then there was no need of engaging highly qualified, experienced, technically competent employees at the project office not in respect of current employees of FC engaged in providing services to MDL. Depending upon where the work is performed, such rates are divided into Italy and India. Further, the reference by the learned AO to pay per man day 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 The feedback report shared by employees of PO captures details in relation to data exchange, technical assistance provided at MDL's premise and payment status etc. Information captured in said feedback reports are preliminary and in relation to general understanding of the project. Thus, it doesn't provide any key inputs for developing of deliverables. As captured at para 10 above, inputs for preparing the deliverables are ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 12 were staying with the employees of PE in India. Therefore, the submission of the assessee that PE has limited role is not correct. Further, it is submitted by the assessee that the project office has helped the HO constantly through video conference and provided required assistance to HO to accomplish the project. provided by MDL to the Appellant Further, the contention of the learned AO that it is admitted fact that the employees from Italy visited to India and were staying with the employees of PE in India is incorrect and without any basis. The Appellant submits that no employee from Italy visited India in the subject year. In the agreement submitted by assessee, the payment has to be released by MDL as per completion of the Milestones mentioned in the agreement. There are two parts of the Milestone, one is nature of work and another is payment for the same. As seen from the Milestones, it is observed that the Milestones are composite and from that it could be established that PE has equally important role in accomplishment of the Milestones /deliverables. On perusal of the scope of work/ activities undertaken, it is seen that almost all the work includes complete involvement of the project office in India such as auditing the facilities at venue and submitting report with suggestions, for The Appellant (Head Office) is solely responsible for development of deliverables under the contract with MDL. Further, details of said milestones as captured in para 10 on page no. 333 to 346 of the Paper book captures name of deliverables involved in each milestone along with corresponding format and indicative due date. The Appellant has submitted the work completion certificate (WCC) signed by MDL capturing the deliverables completed during the subject year. In this regard, your Honours would appreciate that deliverables completed during the subject year are developed substantially only on the basis 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 ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 13 preparing build strategy & design, auditing and consideration of certain aspects mentioned in the SOW, providing technical assistance etc. 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 India are equally qualified and competent to perform the job. Therefore, it cannot be said that the employees deputed at Project Site are not qualified. The learned AO agreed upon the fact that all deliverables/designs are developed in Italy. The employees of PO in India are qualified graduates with experience relevant for the purpose of providing requisite technical assistance on premises of MDL. Mere understanding of the design and technology involved in it does not warrant that said employees can develop such designs on their own. Employees of PO in India do not possess requisite technical skill sets required for developing of designs as their work experience in past is not in field of designing. Further, they do not have access to technical facilities such as AVEVA software etc. required for development of designs. Also, it will be unreasonable to conclude that 8 ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 14 employees of PO in India can independently contribute to 50% of the contract within the specified time limit when various employees from various departments in FC HO are currently working on developing such deliverables. Further, the learned AO stated that the employees deputed at project site 'execute the designs' which is incorrect. The Appellant under the contract does not have the obligation to execute, it's MDL's responsibility to do execution as captured at para 9 above. The employees only assist MDL in understanding the nuances of the deliverables and technical support. The execution i.e. actual ship building exercise is the responsibility of MDL The assessee failed to segregate the work done by the PE in India and Work done by HO in Italy. All services are very much interlinked and cannot be bifurcated only on the basis of salary paid to employee of PE in India. Your Honours would appreciate the fact that the Assessee has not denied inter linkages of the scope of work performed by head office and project office. However, the learned AO failed to appreciate the fact that FC PO is set up for a limited purpose of on-site support and technical assistance and not to perform work in terms of preparing deliverables which is the essence of the contract. 11. Thus, ld. Counsel concluded that the ld. AO without taking into cognizance the deliverables under the contract which by nature reflects that they have developed in Italy is simply on ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 15 adhoc basis income of the head office 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 and technology upgradation. The deliverables as per the contract was mainly design / drawings or a review report which was prepared by the assessee in Italy on the basis of inputs from the MDL. Under the contract assessee also has undertaken to provide technical assistance to MDL and training of MDL employees. However, the ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 16 crux of the contract remains to be designed document developed by the assessee in Italy on the basis of inputs given by the MDL. This fact has also been affirmed by the MDL vide its letter dated 17/10/2022 which clearly state that all the deliverables are prepared by the assessee in Italy. All the delivery of the deliverables has been made through Secured Data Exchange (SED) set up for this purpose. The assessee has also submitted airways bills and proforma invoice to evidence that transfer deliverables has been made from Italy to India. The contract price on a lump sum amount was €40 million for the agreed deliverables and additional contracts, man day rates were also provided for any additional services for MDL may require. All the taxes in respect of sub-contract outside India were to be borne by the assessee, because all the taxes arising in India was to be borne by MDL. Thus, as per the agreement / contract deliverables were prepared in Italy on the basis of inputs given by MDL for the construction of Navy ships and then delivered to India was set up with eight employees to provide necessary technical support and on-site assistance under the contract. 15. In a succinct manner, the activities highlighting the contract can be summarized in the following manner:- The responsibility to construct the ships is of MDL. Assessee is only required to prepare the deliverables (design and review documents) basis. the inputs provided by MDL which is done in Italy. ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 17 Accordingly, all risks and major activities are undertaken by the Head office. The Project office plays a limited role of on-site technical assistance to MDL. 16. For attributing the profit of the PE (herein branch office), the most important factor which needs to be taken into consideration is, whether the PE was remunerated on arm’s length basis which has to be judged based on functions, assets and risk analysis. As noted above, the detailed transfer pricing study was conducted based on FAR analysis to justify the remuneration / attribution of income to the PO. 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 Yes Limited ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 18 supervision 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 per the inputs provided by customers, formats, assembly production drawings etc. No role Project Management and Supervision Interacting with customer and coordinating with various internal departments Ensuring that timelines are met, tracking Monitoring costs incurred No role Technical assistance Supervising employees of PO involved in providing on premise technical assistance Providing requisite onsite technical assistance in understanding certain specific nuances of the ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 19 drawings and designs, providing technical support required by customer in construction of ships Quality assurance Performing adequate equality checks, test procedures and inspection, as necessary, for the activities performed by employees of project office in India No role 18. Likewise summary of risk borne by the PO and HO pertaining to the provisions of technical consultancy services is summarized in the following manner:- Type of Risks Fincantieri HO (Italy) Fincantieri PO (India) Market risk Yes No Product/ service liability risk Yes No Contract risk Yes No Technology Obsolescence risk Yes No Data privacy risk Yes Limited Credit and collection risk Yes No Foreign exchange risk Yes No Idle capacity risk Yes No Manpower risk Yes No ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 20 19. From the above FAR it is manifest that the major functions and the activities are carried out by the head office in Italy and the PO in India has practically very limited role and no risk. Thus, according to FAR analysis, the revenue from the said contract mostly pertains to assessee in Italy and only a limited attribution can be made to the PO i.e. PE. 20. Before us it has been stated that assessee has adopted Transaction Net Margin Method (TNMM) to be the most appropriate method and assessee had selected 12 comparables and the following weighted average of operating profits on operating cost was given in the TP study report in the following manner:- Sr. No. Name of the company Weighted average of operating profits on operating cost (%) 1 Blackstone Group Technologies Private Limited -4.15% 2 Semac Consultants Private Limited -2.67% 3 Desein Private Limited 1.94% 4 Intercontinental Consultants and Technocrats Private Limited 4.46% 5 Balaji Rail Road Systems Private Limited 5.31% 6 ASM Technologies Limited 7.81% 7 Development Consultants Limited 8.82% ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 21 8 Tata Consulting Engineers 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; ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 22 assets deployed to the PE for carrying out the activity and risk assumed by the PE in performing the function for the FE. 22. Another important fact here is that the PO worked under control and the supervision and guidance of head office and the functions of the project office (herein referred to as Designer) were identified in the TP study report was mainly:- Designers who assist customers in understanding the design deliverables prepared and shared by Head Office. The Designers act as an interface between Head Office and customer. Planning and production management specialist(s) who assist customers in following the plan developed by Head Office for the construction of the ships with the objective of reducing the time taken to build a ship. However, the responsibility of construction of the ships remains with customer. Production specialists who provide technical advice to customers in relation to the construction of blocks, assemblies, etc under the guidance of Head Office. 23. Thus, ALP was determined on the basis of Rule 10B of Income Tax Rules for comparing the international transaction of provision of technical services keeping in mind the FAR analysis. Based on this TP study analysis, attribution of income to the branch office was made at Rs.12,85,53,113/- based on arm’s length principle and was determined by adding up a suitable mark-up of 19.36% to the total cost incurred in the year by the ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 23 said project office in India. The ld. TPO has simply brushed aside the TP study report in a very casual manner stating that in TP study report calculation of income attributable to the PE based on transfer pricing study method is done by taking comparables from other sectors instead of highly technical services as in the instant case. Nowhere, ld. AO has either referred the matter to the ld. TPO or has discussed why any of the comparables or the method applied to the assessee is incorrect. Thus, without carrying out FAR analysis no further income can be attributed to the PE. Accordingly, we hold that the allocation / attribution of income to the PE are at arm’s length and no further attribution is required to be there. 24. Even otherwise also ld. AO without any TP study analysis or reference to the ld. TPO has attributed 50% of the total receipts when major functions and activities were carried out in Italy and all the risks were assumed in Italy. Accordingly, such an adhoc attribution without FAR analysis or even going through the functions and activities 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 ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 24 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 functions have been undertaken by the ld. AO which is based on principle reasonableness and fair. 27. First of all, even if we agree with the contention of the ld. DRP, then nowhere it is seen that ld. AO has taken any reasonable basis or conducted any genuine FAR analysis of the functions and activities carried out by the HO and PO which we have highlighted in detail in the foregoing paragraphs. Otherwise also, if there are transaction between two AEs, then the TP provisions are applicable and the term defined u/s. 92F (iii) also include permanent establishment of such enterprise who is or was proposed to engage in certain activities or business. In view of specific inclusion of term PE, in the definition of the term ‘enterprise’ has been given, then the transaction between the foreign AE and its PE is to be regarded as ‘transactions’ between ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 25 two enterprises’ under the Act. Thus in our view, Fincantieri Spa, Italy and its project office in India would qualify as ‘associated enterprise’ and accordingly, TP principles are applicable as transaction between PO in India and HO in Italy. In the present case PO in India is akin to a service provider to the AE in Italy and such services provided by PO in India to AE in Italy would qualify as international transaction and therefore, PO in India should be rendered at arm’s length price from the head office, Italy for the services received by it. Further, Article 7(2) of India- Italy DTAA which reads as under:- “Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment\" 27. Thus, the aforesaid para of Article 7 clearly requires that PE is deemed as distinct and separate enterprise for the purpose of PE attribution and profits attributable to PE need to be determined in line with the ALP principle. This view is now well supported by the judgment of ITAT Special Bench, Ahmedabad in the case of BEA Shenyang Transformer Group Company Ltd. [2024] 169 taxmann.com 145, wherein the question referred to the Special Bench of the ITAT was:- ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 26 - 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 complied with the assessee and ld. AO has failed to carry out such analysis and adhoc adjustment cannot be sustained or upheld. Accordingly, such ground raised by the assessee is also allowed. 29. Other grounds are not decided and are kept open. ITA No.3313/Mum/2023 Fincantieri SPA, Mumbai 27 30. In the result, appeal of the assessee is allowed. Order pronounced on 28th March,2025. Sd/- (VIKRAM SINGH YADAV) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 28/03/2025 KARUNA, sr.ps Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// "
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