TaxTMI 
TaxTMI 
2026 (7) TMI 1962
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.... profits effectively connected to the operations performed by such office in India: The Learned AO and the Hon'ble DRP has erred in law and facts in attributing direct income (receipts) of INR 20,19,18,980 to the project office of the Appellant (i.e. Permanent Establishment) i.e., allocating 50% of the income earned during the subject year instead of only profits effectively connected to the operations performed by it in India on an ad hoc basis. 2. Without prejudice to above, erred in allocating/ attributing additional income basis gross receipts without considering the expenditure incurred corresponding to such additional income: Without prejudice to the above ground, the Learned AO and the Hon'ble DRP has grossly erred in law and facts in making the impugned attribution to India Project Office on gross basis instead of attributing the profits after considering/ allowing the benefit of expenses incurred by the Appellant against the income of INR 20,19,18,980. 3. Erred in computing income attributable to permanent establishment without referring the subject matter to Transfer Pricing Officer: The Learned AO and the Hon'ble DRP erred in ....
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....ore vessels, from high-complexity ferries to mega yachts, as well as production of systems and component equipment for mechanical and electrical segments, from cruise ship interiors solutions, electronic and software systems, to infrastructures and maritime constructions, as well as after-sales services. It had entered into contract with Mazagaon Dock Shipbuilders Limited (MDL) for services as know-how provider for technology upgradation and capability enhancement (KHP for TUCE) for facilitating construction project 17A ships in India. It entered into single contract and agreement for completion of project and provision of services to MDL in relation to the ongoing project with Mazagaon Dock Yard in ship building sector. 4.1 During the year under consideration, the assessee had established project office in India having employees from Italy to provide services like knowhow of the technology up gradation, capability enhancement, build strategy and build plan, preparation of designs and production drawings, project management and supervision, technical assistance, quality assurance etc in relation to the ongoing project with Mazagaon Dock Yard in ship building sector. In the relev....
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....eipt of Rs. 66,99,00,000/- from the said project services. It was confirmed that there was only one agreement with MDL based on which services are being provided as discussed above. The assessee had expressed its inability to provide the tender documents within the required time for the reason, the documents being more than 6 to 7 years old and hence, archived. The AO concluded that the entire income was generated out of single Project. There was single contract in respect of the above cited project with Mazagaon Dock Yard. The entire contract was to be completed together by HO and PE in India. It was not possible to apportion the consideration for design on one part and the other activities on the other part. The price paid to the assessee was the total contract price which covered all the stages involved in the completion of the project. In this regard, the assessee was asked to offer detailed explanation for the basis of offering the revenue of Rs. 53,68,68,981/- u/s. 115A @10% and how the same was different from the revenue of Rs. 13,30,31,019/- attributable to PE in India, as claimed by it. In response, the assessee submitted that "the balance amount of Rs. 53,68,68,981/- had ....
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....t was related to direct income of HO in spite of the fact that there was a single contract for completion of the project with MDL. In response to show cause notice, the assessee referred to various clauses of the contract agreement dated 07.07.2015 and stated that the significant portion of the contract is undertaken by the assessee in Italy and employees deputed to India were not qualified to provide the deliverables envisaged under the contract with MDL. They simply act as a liaison between the assessee and customer i.e. MDL. The submission of the assessee regarding limited role of PE in execution of the contract with MDL was not found acceptable in view of following facts and observations: "That to accomplice the assigned work at above cited project with Mazagaon Dock Yard, there was an established project office of assessee in India which is involved in providing technical assistance in design, planning and production activities of ships as per the agreement with MDL. From the submissions filed by the assessee during course of assessment scrutiny proceedings it is found that the assessee needed to provide following services to the MDL which are as under:- A. B....
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....lved in providing such technical assistance at customers' location in India E. Quality assurance: Performing adequate quality checks, test procedures and inspection, as necessary, for the activities performed by employees of project office in India." 4.6 The AO further stated that the assessee vide submission bifurcated the activities performed by HO and Project office. Wherein it attempted to shift the major activities in the hand of HO and considered limited role for Project office in India, which was not the correct view as per him. To get these above activities done, highly skilled, technically well qualified professional, employees were required. During course of proceedings, the assessee was asked to provide the details of the employees engaged in the project office at India. It was seen from the above that employees deputed to India were highly qualified and specialist in their field having experience of more than 5 to 6 years in their role as per details submitted for scrutiny assessment for A.Y. 2020- 21. Also, seen from copy of agreement that they were paid well in India (Euro 1675 per man day in India as compared to Euro 879 in Italy). All were capable for pe....
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....l systems inspection and test procedures as necessary for the construction, setting to work, trials and successful completion of ships, preparing ab-initio system design as per SORs, preparing formats for production drawings, CAM information and assembly production drawings followed by block wise review of Assembly planning drawings for FOC at MDL and GRSE, imparting training and technical assistance. 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 preparing build strategy & design, auditing and consideration of certain aspects mentioned in the SOW, providing technical assistance etc. Further, the case law cited by the assessee is accordingly on different pedestal therefore not applicable in the case. 4.9 It was concluded that 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 could not be bifurcated only on the basis of salary paid to employee of PE in India. It had not provided details of persons/employee....
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....ld.DR on the other hand relied on the orders of the lower authorities. 10.1 We have gone through the order of the ITAT referred above. Relevant parts of the order are extracted below for ready reference: "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 Fincantieri SPA, Mumbai 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 ....
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..... 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 Fincantieri SPA, Mumbai 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 along with 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 ....
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....or 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 Fincantieri SPA, Mumbai 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............................. 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....
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.... 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. Fincantieri SPA, Mumbai • 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 whic....
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....omers 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 Fincantieri SPA, Mumbai said project office in India. The ld. TPO has simply brushed aside the TP study report in a very cas....