2025 (4) TMI 153 - AT - Income Tax

ITAT rules permanent establishment income attribution requires arm's length analysis under transfer pricing provisions

Fincantieri SPA Italiani SPA Trieste (TS) Via Genova Versus The Assistant Commissioner of Income Tax, INT Tax Circle 2 (3) (1), Mumbai

ITAT Mumbai held that attribution of income to a permanent establishment constitutes an international transaction requiring arm's length analysis under ... Accrual of income - attributing provision for fees and technical services income (receipts) to the project office of the assessee, i.e., permanent establishment - whether 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? 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 HELD THAT:- 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. Even otherwise also 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. 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 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 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 in the case of BEA Shenyang Transformer Group Company Ltd [2025 (1) TMI 1274 - ITAT AHMEDABAD] as 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. 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. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include: Whether the Assessing Officer (AO) was justified in attributing 50% of the gross receipts to the project office (PO) in India, treating it as a permanent establishment (PE), without conducting an arm's length price (ALP) determination. Whether the attribution of income to the PE should have been based on a detailed transfer pricing study and FAR (Functions, Assets, and Risks) analysis. Whether the AO's attribution of income without reference to the Transfer Pricing Officer (TPO) was appropriate. Whether the transactions between the foreign enterprise and its Indian PE qualify as international transactions subject to ALP adjustments under transfer pricing regulations.2. ISSUE-WISE DETAILED ANALYSISAttribution of Income to the Permanent Establishment Relevant Legal Framework and Precedents: The attribution of income to a PE should be based on the arm's length principle as per Article 7 of the India-Italy Double Taxation Avoidance Agreement (DTAA). The principle is that the PE should be treated as a distinct and separate enterprise dealing independently with the enterprise of which it is a part. Court's Interpretation and Reasoning: The Tribunal emphasized that the attribution of income to the PE should be based on a detailed transfer pricing study and FAR analysis. The AO's attribution of 50% of the gross receipts to the PE was deemed arbitrary and not based on any FAR analysis or ALP determination. Key Evidence and Findings: The assessee provided a transfer pricing study report that included a FAR analysis and demonstrated that the PO in India played a limited role, mainly providing on-site technical assistance. The major deliverables, including designs and drawings, were prepared in Italy. Application of Law to Facts: The Tribunal found that the AO did not perform any FAR analysis or seek a determination from the TPO, which was necessary to justify the attribution of income to the PE. Treatment of Competing Arguments: The Tribunal considered the AO's contentions and the assessee's rebuttals. It concluded that the AO's assumptions were not supported by evidence and that the attribution of income should be based on the arm's length principle. Conclusions: The Tribunal held that the attribution of income to the PE should be based on the transfer pricing study and FAR analysis, and the AO's arbitrary attribution of 50% of the gross receipts was not justified.Application of Transfer Pricing Regulations Relevant Legal Framework and Precedents: Under Section 92F of the Income Tax Act, transactions between a foreign enterprise and its Indian PE are considered international transactions subject to transfer pricing regulations. Court's Interpretation and Reasoning: The Tribunal held that the transactions between the foreign enterprise and its Indian PE should be treated as international transactions for the purpose of determining ALP. Key Evidence and Findings: The Tribunal referred to the Special Bench decision in the case of BEA Shenyang Transformer Group Company Ltd., which supported the view that transactions between a foreign enterprise and its PE in India are subject to ALP adjustments. Application of Law to Facts: The Tribunal found that the assessee had complied with transfer pricing regulations by conducting a detailed transfer pricing study and determining the ALP for transactions between the PO and HO. Treatment of Competing Arguments: The Tribunal rejected the AO's contention that the attribution of income did not require reference to the TPO and emphasized the need for compliance with transfer pricing regulations. Conclusions: The Tribunal concluded that the attribution of revenue between the PO and HO is an international transaction subject to transfer pricing regulations, and the AO's failure to conduct a proper analysis rendered the attribution invalid.3. SIGNIFICANT HOLDINGS The Tribunal held that the attribution of income to the PE should be based on a detailed transfer pricing study and FAR analysis, and the AO's arbitrary attribution of 50% of the gross receipts was not justified. The Tribunal emphasized that transactions between a foreign enterprise and its Indian PE qualify as international transactions subject to ALP adjustments under transfer pricing regulations. The Tribunal concluded that the AO's failure to conduct a proper FAR analysis or refer the matter to the TPO rendered the attribution of income to the PE invalid. The Tribunal allowed the appeal of the assessee, rejecting the AO's attribution of income to the PE and emphasizing the need for compliance with transfer pricing regulations.