Case Law Details
DCIT Vs Transocean Drilling Services (I) Pvt Ltd (ITAT Mumbai)
ITAT Mumbai held that when the transaction is in the reimbursement of expenses to AE, the third party cost incurred is a Comparable Uncontrolled Price (CUP) for the reimbursement. Accordingly, adjustment proposed is directed to be deleted.
Facts- The assessee company is engaged in the business of coordination / liaisoning services to the group companies. During the year under consideration, the assessee company has shown revenue from operations at Rs.6,54,08,130/- and other related income at Rs.29,78,840/-.
AO found that the assessee company had entered into Contractor Agreement with Oil and Natural Gas Corporation Ltd. (ONGC) for the hire of drilling rigs and had given a sub-contract of the same activity to its group company. A reference u/s 92CA(1) of the Act was made by the AO to the file of the TPO for determining the ALP of international transactions carried out by the assessee.
The assessee is an Indian company liable to income tax in India as per the provisions of the Act. The AE of the assessee is engaged in offshore drilling activities by deploying rigs and skilled personnel. The AEs operate as project offices in India and pay taxes in India under section 44BB of the Act @40% plus surcharge and cess on the income determined @10% of total receipts on a gross basis. On the contrary, the assessee is engaged in providing coordination / liaisoning services to AEs and remunerated the cost plus markup basis on its own cost.
The only dispute is that though the assessee has debited exchange loss of Rs.4,13,05,616/- in its profit and loss account, it had not claimed mark-up on that to the extent of 10% from its AE during the year under consideration on the ground that the same is actually not incurred and is merely notional exchange loss and that it had resulted due to restatement of the pending liability as on the balance sheet date to comply with Accounting Standard-11 issued by the Institute of Chartered Accountants of India (ICAI).
Further, TPO had observed that the assessee had reimbursed expenses to AE towards travel, accommodation, conveyance, communication charges, cargo costs, stock-based compensation, employee expenses, freight charges etc. without any markup.
Conclusion- We hold that assessee was duly justified in not adding mark-up of 10% on this exchange loss considering the fact that it is purely notional in nature in the peculiar facts and circumstances of the instant case.
Held that when the transaction is in the reimbursement of expenses to AE, the third party cost incurred is a CUP for reimbursement. Accordingly, the CUP method chosen by the assessee considering the nature of the transaction and degree of comparability as the Most Appropriate Method is hereby upheld.
We find that either way all these expenses have been duly included in the total expenses included by the assessee on which markup of 10% has been claimed by the assessee from its AE. Hence, the action of the TPO in determining the ALP of this transaction at ‘Nil’ is absolute without any basis and the adjustment proposed in the sum of Rs.19,94,336/- is hereby directed to be deleted.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal in ITA No.2988/Mum/2019 & Cross Objection in CO No.05/Mum/2021 for A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-58, Mumbai in appeal No. CIT(A)-58,Mumbai/10222/2017-18 dated 19/02/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s.144C(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/03/2016 by the ld. Dy. Commissioner of Income Tax-15(3)(1), Mumbai (hereinafter referred to as ld. AO).
2. At the outset, we find that the cross objections preferred by the assessee is delayed by 279 days. We find that the cross objections has been preferred during the Covid period and in view of the relaxation granted by the Hon‟ble Supreme Court in light of Covid-19 pandemic, the delay in filing of cross objections is hereby condoned and the same is taken up for adjudication.
3. The ground Nos.1-6 raised by the assessee in cross objections are general in nature and does not require any specific adjudication as stated by the ld. AR before us.
3.1. The other grounds raised by the assessee in its cross objections would be dealt hereinafter while addressing the grounds raised by the Revenue.
4. The Revenue has raised the following grounds of appeal:-
- “On the facts and in the circumstances of the case and in law, the Ld. CITIA) erred in directing the AO/TPO to include Agricultural Finance Corporation Ltd., as a comparable entity ignoring the fact that, the appellant itself has conceded to exclude this entity from comparability analysis before the TPO during the Transfer Pricing Proceedings and this entity is engaged in completely different functional sector and not comparable different functional sector and not comparable with assessee’s functionality.”
2. “On the facts and in the circumstances of the case and in law, the Ld. CITIA) erred in deleting the TP adjustment made on account of Commission for Procurement and Assignment of Contract amounting to Rs.9,71,21,344/-despite the fact that, the appellant itself has provided the benchmarking analysis and ALP commission for this activity determined at 1.56% based on Royalty Stat Database before the TPO during the Transfer Pricing Proceedings.”
3. “On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the basic tenet of Transfer Pricing as enshrined in Section 92F(ii) that no unrelated party in uncontrolled circumstances would have passed on such huge contract amount exceeding Rs.622.57 Crores without charging or retaining any commission.”
4. “On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating the fact that, the name lending and front end entity activities done by assessee for bidding process in availing contract from ONGC for the benefit of its AEs derive Arm’s Length Compensation.”
5. The appellant prays that the order of CIT(A), Mumbai on the above directions be set-aside and that of the assessing officer be restored.
6. The appellant craves leave to amend or alter any of the grounds or add a new ground of appeal, which may be necessary, at any time before or at the time of hearing of appeal.”
4.1. We have heard rival submissions and perused the materials available on record. The return of income for the A.Y.2012-13 was filed by the assessee company electronically on 30/11/2012 declaring total income of Rs.2,42,79,910/-. The case was selected for scrutiny vide issuance of notice u/s.143(2) of the Act on 16/08/2013 which was duly served on the assessee. The assessee company is engaged in business of coordination / liasoning services to the group companies. During the year under consideration, the assessee company has shown revenue from operations at Rs.6,54,08,130/- and other related income at Rs.29,78,840/-. The ld. AO found that assessee company had entered into Contractor Agreement with Oil and Natural Gas Corporation Ltd. („ONGC’ in short) for hire of drilling rigs and had given sub-contract of the same activity to its group company. A reference u/s.92CA(1) of the Act was made by the ld. AO to the file of the ld. TPO for determining the Arm’s Length Price (ALP) of international transactions carried out by the assessee.
4.2. The assessee is an Indian company liable to income tax in India as per the provisions of the Act. The AE of the assessee is engaged in offshore drilling activities by deploying rigs and skilled personnel. The AEs operate as project office in India and pay taxes in India u/s.44BB of the At @40% plus surcharge and cess on the income determined @10% of total receipts on gross basis. On the contrary, the assessee is engaged in providing coordination / liasoning services to AEs and remunerated the cost plus mark up basis on its own cost. The AEs of the assessee have been carrying out the same operations in India even prior to the arrangements entered into through the assessee due to the bid requirement of ONGC. Previously, AEs have been computing its profit u/s.44BB of the Act and paying taxes in India as stated supra. The same basis continued even after the arrangement from the assessee came into existence. The assessee always pleaded that there is no logical reason for the assessee / AE to enter into these arrangements to shift the profit and there is no such incident based on the facts of the case.
4.3. As per the Transfer Pricing Study Report (TPSR), Transocean group is the world’s largest offshore drilling contractor providing the most versatile fleet of mobile offshore drilling units to help clients find and develop oil and natural gas reserves. It offers a complete package vis-a-vis constructing oil and natural gas wells in the deep waters and harsh environments of various water depths and field development needs. The assessee company (TDSIPL) was incorporated in May 2008, as a wholly owned subsidiary of Transocean Offshore International Ventures Ltd which is in turn an indirect subsidiary of Transocean Ltd (Switzerland). During the A.Y.2011-12 and A.Y.2012-13 i.e. the year under consideration, TDSIPL(assessee) was engaged in provision of coordination services to the Transocean group entities vis-à-vis ONGC contracts for offshore drilling operations.
4.4. The details of international transactions entered into by the assessee with its AEs are in respect of provision of support services for which assessee had benchmarked the same using Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and in respect of recovery and reimbursement of expenses, the assessee has benchmarked the same using Comparable Uncontrolled Price (CUP) Method as MAM. It is not in dispute that assessee‟s overseas Associated Enterprises have the necessary skill sets and assets to provide offshore drilling services of oil and gas exploration and production. It is also not in dispute that assessee does not possess such skill sets nor does it own the assets or the personnel that will enable it to render such services. For the sake of commercial prudence, the assessee had entered into service contracts with ONGC. However, since the assessee did not have the relevant skill sets / assets/ personnel for the provision of services to ONGC, this contract was sub-contracted by the assessee to its AEs with the prior consent of ONGC. Infact, the tender document of ONGC itself clearly permit the rendering services by the AE to ONGC. In this regard, the tender document for chartered hire of preliminary unit “J P ANGEL” between ONGC and assessee dated 20/08/2010 clearly captures the Memorandum of Understanding dated 02/02/2010 entered into by the assessee company with its AEs; agreement dated 02/02/2010 between assessee company and its parent company i.e. Transocean Offshore International Ventures Ltd (AE). This goes to prove very clearly that the ONGC in the tender document itself had taken due cognizance of the back to back contract arrangement entered into by the assessee with its AEs for rendering of offshore drilling services considering the fact that assessee does not possess the requisite skill sets / assets and personnel for rendering services to ONGC. The ld. AR pleaded before us that assessee company had employed merely 7 persons for rendering the liasoning and coordination services to its AEs as well as to ONGC. Hence, the entire cost incurred by the assessee on rendering of the services had been marked up with 10% and recovered from its AEs. In this regard, the following documents would be relevant for our consideration:-
(a) Copy of tender issued by ONGC in relation to one of the Rig i.e. J P ANGEL (enclosed in pages 82-83 of the paper book)
(b) Copy of agreement between ONGC and assessee in relation to one of the Rig i.e. J P ANGEL (enclosed in pages 86-221 of the paper book)
(c) Sub-contracting agreement between assessee and AE in relation to one of the Rig i.e. J P ANGEL (enclosed in pages 220 to 262 of the paper book)
(d) Memorandum of Understanding between the assessee and AE (enclosed in page 263 of the paper book)
4.5. It is pertinent to note that ONGC had taken due cognizance of the aforesaid documents and also the inability of the assessee company to render the requisite offshore drilling services. Accordingly, ONGC as part of tender documentation had imposed a condition that the AE should issue corporate guarantee to ONGC to enable ONGC to issue the contract to the assessee company. Actually, this corporate guarantee is the main basis for ONGC to award the contract in favour of the assessee company, so that ONGC is fully secured of obtaining the technical expertise / experience and services of the AE which would in turn result in smooth implementation of the contract. ONGC is fully aware that it is the AE who is going to perform the contract. ONGC is also aware that entire risk is only on the AE and not the assessee, more so, in case, if the assessee fails to perform the contract, pursuant to the back to back arrangement with the AE and the corporate guarantee issued by the AE in favour of ONGC. The AE had to step in and address the issue of performance of rendering of services to ONGC. Hence, this is a clear case of complete secured contract entered into by ONGC with the assessee on the technical strength / credentials and corporate guarantee of AE.
4.6. The ld. DR drew our attention to various clauses of the argument entered into by assessee with ONGC to drive home the point that assessee had to undertake various risks attached with the performance of the contract. The main crux and essence of the argument of the ld. DR is that since the entire risk is undertaken by the assessee in the capacity of contractor to perform the offshore drilling services to ONGC, it should be adequately compensated with the said rigs undertaken by the AE in addition to the cost plus mark up reimbursed by the AE. This has not been compensated to the assessee and hence, the ld. TPO had adopted the ALP rate of 1.56% from Royalty STAT software based on the comparable instances and data submitted by the assessee before the ld. TPO. The ld. CIT(A) duly appreciated the contentions of the assessee and the modus operandi adopted by the assessee with regard to execution of contracts for ONGC and deleted the ALP adjustment made by the ld. TPO on the impugned issue.
4.7. In our considered opinion, the various arguments advanced by the ld. DR as summarized hereinabove are contrary to the facts and materials available on record ignoring the cognizance taken by ONGC in the tender documentation itself as detailed supra. Hence, the various arguments advanced by the ld. DR drawing our attention to certain clauses in the agreement entered into between the assessee and ONGC are totally irrelevant and are hereby dismissed. Accordingly, we have no hesitation to conclude that the issue in dispute for A.Y.2012-13 is squarely covered by the decision rendered by this Tribunal in assessee‟s own case for A.Y.2011-12 in ITA No.453/Mum/2016 dated 13/01/2017. In fact, in A.Y.2011-12, the ld. TPO had stated that assessee was engaged in carrying marketing activities for which it had to be separately remunerated apart from cost plus 10%. Various observations made by the ld. TPO in page 13 and 14 of its order for the year under consideration are reproduced hereunder:-
“The claim of the assessee is considered. And is addressed as below
1. The assessee claims that it is not a marketing or sourcing entity. This is not a valid argument. Whether the assessee is a “marketing or a sourcing entity in general is not the determinant of the functionality of the transaction. What the assessee has done in the transaction under consideration is important, and the role of the assessee is that of potting contract and passing it on back to back to the AEs. In case, the contract had been passed on to a third party, rationality principle in economics would have ensured that the assessee would sock compensation or reward.
2. The assessee has not done any marketing or sourcing of contract from ONGC, It claims. This is not a valid argument as without the same it would not have got the contract at all. The formation of the assessee was to fulfill the commercial requirement of getting a contract. This is also a normal industry practice where the contract is obtained in the name of one party but is performed by the sub-contractee. The profits of execution are for the sub- contractee but the contractor retains a margin before it passes on the contract back to back.
3. The assessee claims that it did not have any employees to do the bidding formality and hence, the same was also done by the AEs. This is again not a valid argument. The reward is for legally getting the contract and passing on the same to the AEs. The fact that the employees of the AE helped the assessee in getting the same is a matter of convenience or internal arrangement as the entire profits of execution would go to the AEs. It does not change the fact that the service of the procurement of contract and passing on the same to the AF was done by the assessee. Neither does it change the fact that the initial incidence of risk lies on the
4. The assessee claims that the amount to be charged should be adjusted against the income already disclosed in the books. This again is a fallacious argument. The receipt reflected in the books is for the specific support and coordination services that it performs for the AES. The procurement of the contract and passing on of the same to the AEs is a distinct activity, it is not coordination or support service in nature. It is an activity that involves the acceptance of the initial incidence of risk legally and being held liable for any criminal breach.
5. The assessee claims that all the responsibilities and obligations were passed on to the AES. This is again not a valid argument. The assessee has passed on the execution risks and the associated profits to the AES. The point that is being discussed here is the compensation for bearing the initial risk; for the procurement of the contract and taking the legal obligations associated with it being the initial/primary obligant. After the contract has been passed on, the risk sare that of the assessee; but that does not mean that the act of passing on the contract or a profit earning asset/activity should be unrewarded.
6. The assessee states that the contract was given on the financial and technical capacity of the ABS; but that does not alter the fact that the contract was awarded to the assessee legally and the same has been passed for execution to the AEs Therefore, the assessee may not earn the profits of the execution neither should take the receipts/payments form part of its operations; but the fact that the contract was awarded to it and the fact that it has passed on the same to the AEs remains undisturbed.
7. The conclusion is that the assessee should a reward. In fact, the assessee itself has get asserted that “typically” the commission rate in the industry is in the range of 1% for procurement of contracts” which implies that the industry practice is well known.
8. ALP rate for the assignment of the contract is the next step. The assessee has submitted that the rate of 2% that has been proposed by the TPO is inappropriate and the same should be 1%, as per industry practice. It has also submitted a “sourcing agent comparable fist which gives an ALP margin of 1.56%. The same is accepted and the ALP rate for the contract assignment is determined at 1.56% of the contract value.
9. The same is computed at 1.56% x 622,57,27,179 = 9,71,21,344/- which is the proposed adjustment.”
4.8. We find as stated supra, the very same observations were made in A.Y.2011-12 also by the ld. TPO and this Tribunal had deleted the adjustment vide its order dated 13/01/2017. We find that this Tribunal in A.Y.2011-12 had analysed the various clauses of the agreement between ONGC and assessee and back to back agreement between assessee and its AE in tabular form in respect of all the clauses thereon. For the sake of convenience, the facts prevailing in A.Y.2011-12; observations made by the ld. TPO thereon and the findings of this Tribunal for A.Y.2011-12 are reproduced hereunder:-
3. Shorn of unnecessary details, relevant facts are Transocean Group is stated to be the world’s largest off–shore drilling contracts providing the most versatile fleet of mobile off–shore drilling unit to help clients find and develop oil and natural gas reserves. The Transocean Group consisting of a number of companies such as Transocean Off–shore International Ventures Ltd. (TOIVL), SEDCO Forex International Drilling Inc. (SFID), Triton Holdings Ltd. (THL) and R&B Falcon (A) Pty. Ltd. (R&B) has the necessary skill sets and assets to provide off– shore drilling as well as gas exploration and development services. The Group offers a complete package vis–a–vis constructing oil and natural gas wells in deep waters and harsh environment of various water depths and field development needs. The Group companies have the capabilities and experience of providing drilling services to Indian customers for more than two decades. ONGC, A Government of India Undertaking, is stated to be one of the biggest customers of the Group in India. Some time in the year 2008, Oil & Natural Gas Corporation (ONGC) floated tender of charter hire of seven numbers 300 ft. independent LEG Cantilever Type Off–shore Jack and Rigs (Drilling Rigs). One of the main conditions of the tender was multiple entities of the same group were not allowed to bid for the tender. Due to such pre–condition, the Transocean Group incorporated a wholly owned subsidiary in the name of Transocean Drilling Services India Pvt. Ltd. (TDSIPL), a company in India, to enter into contract with ONGC, which is the assessee before us. The assessee submitted its tender and ultimately being successful entered into agreements with ONGC for off–shore drilling services. However, as claimed by the assessee, since it did not have the relevant assets / rig or skill sets or experience or requisite personnel to perform the drilling operation, the ONGC awarded contract to the assessee on the financial and technical backing of its parent company TOIVL and other companies in the group who owned the required drilling equipments / rigs and personnel for execution of contract with ONGC. For the impugned assessment year, the assessee filed its return of income on 25th Nov 2011, declaring total income of ₹ 68,61,523. The Assessing Officer having noticed that the assessee had entered into international transactions with its A.E. made a reference to the Transfer Pricing Officer for determining the arm’s length price of the international transaction. In the course of proceedings before him the Transfer Pricing Officer on examining the audit report submitted by the assessee in Form no.3CEB, noticed that the assessee has reported the following international transactions:–
i) Provision of support services ₹ 6,37,60,397
ii) Reimbursement of expenses ₹ 29,98,773
4. On examining the transfer pricing study report submitted by the assessee Transfer Pricing Officer noticed, assessee claimed to have provided only the following support services to Transocean Group entities which are undertaking drilling activities:–
i) Contracting / Bid;
ii) Liaisoning and Co–ordination;
iii) Assistance in import of equipments and warehousing;
iv) Accounting and document maintenance; and
v) Invoicing and collection.
5. Besides, the assessee performed other support / administrative activities that would enable the Transocean entities to execute the contract efficiently. He noticed, the assessee has categorized itself as tested party having undertaken lesser risk and bench–marked the transaction by adopting TNMM as most appropriate with OP/OC as the PLI. Assessee had selected five companies as comparables with average updated margin of 5.13% as against margin shown by the assessee of 63.94% after excluding foreign exchange loss and 13.11% including foreign exchange loss. The Transfer Pricing Officer on examining the annual report for the relevant previous year, however, found that the assessee had entered into following transactions with its A.E.
|
Sub–contracting costs paid |
₹ | 369,40,07,189 |
| Recovering of expenses received | ₹ | 4,80,58,593 |
| Reimbursement of expenses paid | ₹ | 3,69,73,756 |
6. The Transfer Pricing Officer noticed that, though, as per Schedule–VI of the annual report income from service was shown at ₹ 410,59,77,730. The assessee has reduced therefrom service tax of ₹ 34,82,10,146, and sub–contractor cost of ₹ 369,40,07,189 and has shown net revenue of ₹ 6,37,60,397, as international transaction with its A.E. in Form no.3CEB. The Transfer Pricing Officer observed, as per the principle of Transfer Pricing Officer, netting of all the international transaction is not permissible. He, therefore, was of the view that the assessee had not correctly reported its international transactions for the assessment year under consideration. Accordingly, he issued a show cause notice to the assessee calling for furnishing of necessary details relating to payments received from ONGC. He also asked the assessee to explain why arm’s length price would not be determined by considering the gross revenue received from ONGC. In response to the show cause notice, though, the assessee justified the bench–marking of international transaction done by it, however, the Transfer Pricing Officer did not accept the submissions of the assessee. Referring to some of the clauses of the contract, the Transfer Pricing Officer observed that the assessee is not a low risk entity but has undertaken certain risk. He also observed that functions of the assessee are very broad and it is not involved merely in liaisoning and co–ordination work. He observed, the A.E. had deputed its experts to the assessee who were earlier in the pay–roll of A.Es. He observed, if the assessee is not involved in operation of the rig and drilling work there was no need for employing rig administrator and rig manager. The Transfer Pricing Officer observed, as the assessee carries out co– ordination, liaisoning, marketing and sourcing function and is also undertaking various risks, it should be entitled to share of profit on the entire value of contract and not mere mark–up on the cost incurred. The Assessing Officer observed, assessee has to pay all the taxes and in case of change of location, the assessee has to bear the expenditure incurred in shifting sub–contractor’s equipment, personnel to the new location. Thus, the assessee is a full fledged risk taking entity. He observed, the A.E. could not have got the subcontract if the assessee would not have been there. As far as comparables selected by the assessee are concerned, the Assessing Officer rejected them and proceeded to select two comparables viz. ICRA Consulting Services Ltd. and Cyber Media Research with average margin of 13.11%. The Transfer Pricing Officer rejected assessee’s claim that the amount paid to its A.Es towards sub–contractor amounting to ₹ 369,40,07,189, is only a pass through cost, hence, should not be considered as part of assessee’s operating cost. Accordingly, Transfer Pricing Officer considered the total contract revenue of the assessee at ₹ 375,77,67,584 and payment made to sub–contractor amounting to ₹ 369,40,07,189 as part of the operating cost of the assessee. As a result, the PLI of the assessee was worked out to 0.37% as against 13.11% of the comparables and the arm’s length profit was determined at ₹ 49,26,43,330 and arm’s length cost at ₹ 32,65,12,425 resulting in upward transfer pricing adjustment of ₹ 47,88,71,298. In pursuance to the order passed by the Transfer Pricing Officer, Assessing Officer proposed the addition on account of transfer pricing adjustment in the draft assessment order. The assessee objected to the draft assessment order before the DRP. The DRP, however, upheld the order of the Transfer Pricing Officer on the issue, whether sub–contracting cost paid to the A.E. should form part of assessee’s operating cost as well as the issue of comparables selected by the Transfer Pricing Officer. Thus, in pursuance to the directions of the DRP, the Assessing Officer passed the impugned assessment order incorporating the transfer pricing adjustment proposed by TPO.
7. Learned Authorised Representative submitted, as per the pre–condition of the tender floated by ONGC, multiple companies of the Transocean Group could not have participated in the bid for supply of rig and off–shore drilling work. In this context, the learned Authorised Representative referred to the provisions of section 2 of the bid document. He submitted to overcome the hurdle and to qualify for participating in the bid, the Group companies, therefore, decided to set–up a subsidiary company in India which can participate in the tender. He submitted, the aforesaid condition was applied for the first time and prior to which all sub– contracting entities were present in India and executing contracts with ONGC. He submitted, as per the bid document, ONGC required the bidder of the tender to be an off–shore drilling contractor with relevant experience to carry out off–shore drilling operation. He submitted the bid document further provided, if the bidder itself did not meet the experience and financial capabilities criteria it can still bid for the tender, provided, the parent company of the bidder fulfills / satisfies the criteria of experience and financial standing. In this context, the learned Authorised Representative drew attention of the Bench to the relevant clauses of the bid document. He submitted, as the assessee did not have relevant assets / rig or experience or requisite personnel to perform drilling operation, ONGC awarded contract to the assessee on the financial and technical capabilities of its parent / A.Es who owned the required drilling equipments / rigs and personnel for execution of the contract with ONGC. He submitted, these facts can be clearly established from various documents / agreements entered into with ONGC as well as A.Es. He submitted, as per the memorandum of understanding between assessee and TOIVL, which is also part of the agreement between ONGC and assessee, it confirms that the A.Es are the owner of drilling unit and the same will be made available for the ONGC contract. The said memorandum of understanding would be valid for the entire duration of the contract and any extension thereafter. He submitted, agreement between assessee and its A.E. TOIVL whereby both the entities mutually agree that the assessee will submit an offer to ONGC and TOIVL has gone through and understood the requirement of the tender and are capable to provide the services for a successful execution of the contract by providing financial / technical support and expertise for fulfillment of obligation as per ONGC contract. He submitted, in pursuance to the said agreement between the assessee and the A.E. to fulfill the terms and conditions of assessee’s contract with ONGC, the A.E. TOIVL provided a guarantee on behalf of the assessee for performance of work. He submitted, the aforesaid documents clearly establish that the assessee did not have the ability to perform any of the service as per the tender. It was clearly understood by the parties to the contract that all the services were due to be provided by the A.E. directly. The assessee only provided co– ordination and liaisoning services between ONGC and the A.E. He submitted, the above documents are part of ONGC contract. The assessee on its part only provided co–ordination and liaison services. It was due to the ability of the A.E. that the assessee has got the contract from ONGC. Therefore, assessee was merely providing liaisoning services and acted as an intermediary between ONGC and A.E. who are actually engaged in providing off–shore drilling service. Learned Authorised Representative submitted, after evaluation and fulfillment of various bid criteria ONGC gave a firm order to the assessee on 14th April 2010 and the firm order was followed up with a detailed contract. On getting the firm order from ONGC, assessee entered into back–to–back contract with its A.Es on the very same date i.e., 14th April 2010. He submitted, the agreement between ONGC and the assessee captured the rights and responsibility of each entity. He submitted, the responsibility agreed in the contract with ONGC was passed on completely to the A.Es in the back–to–back agreement between the assessee and the A.Es (sub– contractor). Thus, effectively the various functions and underlying risk in relation to contract with ONGC were also passed on to the A.Es. To demonstrate the aforesaid fact, the assessee made a comparative analysis of the different clauses of the contract between the assessee and ONGC with contract between the assessee and A.Es as under:–
|
Sr. |
Particulars | ONGC and TDSIPL | TDSIPL and TOIVL |
| No. | Contract (J.T. Angel) | contract (J.T. angel) (Sub- contact) | |
| 1. | Mobilization Period | Clause 1.1(iii) on page 182 of the ITAT paper book
Sub-clause (a) Contractor shall mobilize Drilling Unit along with crew to commence operations within 120 days from date of firm order from Operator. Sub-clause (c) In case Contractor fails to mobilize the Drilling Unit within the period specified in the contract, the operator has right to Sub-clause (f) If the Contractor is unable to mobilize/ deploy the Drilling Unit and commence the operation |
Clause 1.1(iii) on page 314 of the ITAT paper book
Sub-clause (a) Sub-contractor shall mobilize o Drilling Unit along with crew to Sub-clause (d) If Sub-contractor fails to mobilizes and deploy the Drilling Unit along with crew and/or fails to commence operation within the period specified, the Operator has, at its discretion, right to terminate the contract and as a result this agreement shall automatically stand Sub-clause f1) In case Sub-contractor is unable to mobilize/ deploy the Drilling Unit and commence the Operation within specified period…, Contractor may request Operator for extension of time with unconditionally |
| 2. | Duration | Clause 1.3 Sub clause (c) on page 184 of the ITAT paper book
Operator shall have the option to terminate the agreement at any time |
Clause 1.3, Sub clause (c) on page 315 of the ITAT paper book
Contractor (subject to ONGC opting to terminate the contract) shall have the option to Terminate this |
| 3. | Liquidated damages | Clause 1.4 on page 184 of the ITAT paper book
Sub-clause (b) In case Contractor fails to mobilize the Drilling Unit and commence operation, within the stipulated mobilization period… the operator….has the right to terminate the contract. Sub-clause (c) If the Contractor is unable to mobilize the Drilling Unit and commence the operation within the period specified in the contract it may request Operator for extension of time with unconditionally agreeing for the payment of |
Clause 1.4 on page 315 of the ITAT paper book Sub-clause (b)
If Sub-contractor fails to mobilize the Drilling Unit and commence operation, within the stipulated mobilization Sub clause (c) If the Sub- contractor is unable to mobilize the Drilling Unit and commence operation |
| 4 | Inspection | Clause 1.6 on page 185 of the ITAT paper book
Sub-clause 1.6.1: Operator shall get the Drilling Unit and equipment inspected through any of the following internationally reputed third party inspection agency… the cost of third party inspection shall be borne by the Operator… Sub-clause 1.6.2: Operator will accept the Drilling Unit only after Operator nominated third party agency confirms that Drilling Unit is as per the tender specifications. Sub-clause 1.6.3: Contractor confirms completion of inspection and complete readiness of the Drilling Unit in all aspects, to the satisfaction of the Operator including conformity to Operator’s tender specification certified by third party inspection agency at least 30 days prior to stipulated mobilization period. Sub-clause 1.6.4: In case the Contractor fails to adhere to either of the above time schedules Operator reserves the right to invoke the performance bond, forfeit the same and terminate the Agreement without prejudice to any other right or remedy available as per the Agreement. |
Clause 1.6 of on page 315 of the ITAT paper book
Sub-clause 1.6.1: Sub-contractor accepts that the Operator shall get the Drilling Unit and equipment inspected through any of the following internationally reputed third party inspection agency… the cost of third party inspection shall be borne by the Operator… Sub-clause 1.6.2: Sub-contractor acknowledges y and confirms that Operator will accept the Drilling Unit only after Operator nominated third party agency confirms that Drilling Unit is as per the tender specifications Sub-clause 1.6.3: Sub- contractor confirms completion of inspection and complete readiness of the Drilling Unit in all aspects, to the satisfaction of the Operator including conformity to Operator’s tender specification certified by third party inspection agency at least days prior to stipulated mobilization period. 30 Sub-clause 1.6.4 In case the Sub-contractor fails to adhere to either of the above time schedules and consequently Operator invokes the performance bond submitted by the Contractor, forfeits the same and terminated the Contract, the Contractor reserves the right to invoke the performance bond to the extent invoked by the Operator and terminate the Agreement without prejudice to any other right or remedy available as per the Agreement |
| 5 | Depth | Clause 2.1, sub clause (b) on page 186 of the ITAT paper book
The Drilling unit furnished by the contractor hereunder, shall be fully equipped and adequate to drill wells in terms of Clause 2.2 Contractor confirms that the drilling unit shall be capable of drilling unit be capable of drilling wells up to a maximum depth of 6000 meters |
Clause 2.1, sub-clause (b) on page 316 of the ITAT paper book
e e The Drilling unit furnished by the sub- Clause 2.2 Sub-contractor confirms that the drilling unit shall be capable of drilling unit be capable of drilling wells |
| 6 | Hull Structure | Clause 3.5 on page 189 of the ITAT paper book Contractor shall be required to carry our repair of damages or structural defects in the hull structure and/or to carry out required inspections, which prevents the hull structure from performing its normal intended functions. Contractor shall bear all costs towards diesel, water and other services (Air Logistics, material transport and standby boat for safety) in case the inspections/ repairs are carried out at location other than as specified above. |
Clause 3.5 on page 318 of the ITAT paper book
Sub-contractor shall be required to carry our repair of damages or structural defects in the hull structure and/ or to carry out required inspections, which prevents the hull structure from performing its normal intended functions. Sub-contractor shall bear all costs towards diesel, |
| 7. | Deficiencies | Clause 3.6 on page 190 of the ITAT paper book
Sub-clause (1) Contractor equipment shall be maintained by the contractor in sound and efficient operating condition at all times. |
Clause 3.6 of TDSIPL and TOIVL sub-contract on page 318 of the ITAT paper book Sub-clause (2)Sub-contractor equipment shall be maintained by the sub- contractor in sound and efficient operating condition at all times. Should the performance of Sub- contractor’s drilling equipment becomes unsatisfactory or the general standard of performance of work hereunder be aterially reduced because of defective drill pipe, drill collars, or other Sub- contractor’s furnished equipments or by reason of Sub-contractor’s incompetence or negligence, subject to Operator… Contractor shall give Sub-contractor written notice… to correct the specified deficiencies within 15 days failing which the Contractor shall have right to terminate this agreement by giving 30 days notice… |
| 8.
|
Personnel Mobilization
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Clause 3.8 on page 191 of the ITAT paper book
lization …In the event there is a change in |
Clause 3.8 on page 319 the ITAT paper book
In the event there is a change in location, Contractor [subject to |
| 9.
|
Performance
|
Clause 3.10 on page 191 of the ITAT paper book The Contractor undertakes to perform all services under this agreement with all reasonable skill/ diligence and care in accordance with sound industry practice to the satisfaction of the Operator and accepts full responsibility for satisfactory quality of such services. If the Operator is dissatisfied with the work of Contractor, then Operator shall give a written notice specifying the causes of dissatisfaction and Contractor shall correct the specified deficiencies within 15 days failing which Operator shall have the right to terminate this agreement by giving 30 days advance written notice to the Contractor unless the specified deficiencies is corrected within such 30 days period. |
Clause 3.10 of TDSIPL and TOIVL sub-contract on page 319 of the ITAT paper book The Sub-contractor undertakes to perform all services under this agreement with all reasonable skill/ diligence and care in accordance with sound industry practice to the satisfaction of the operator and accepts full responsibility for satisfactory quality of such services. In the event of Operator gives written notice specifying the causes of dissatisfaction to the Contractor, the Contractor shall give Sub-contractor written notice specifying the causes of Operator’s dissatisfaction and Sub- contractor shall correct the specified deficiencies within 15 days failing which Operator shall have the right to terminate this agreement by giving 30 days advance written notice to the Contractor unless the specified deficiencies is corrected within such 30 days period. |
| 10.
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Performance Bond / Performance Guarantee
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Clause 3.11 on page 192 of the ITAT paper book
Clause 3.11: The Contractor has furnished to T the |
Clause 3.11 on page 320 of the ITAT paper book
Clause 3.11: The Sub-contractor has furnished to the Contractor an irrevocable and |
| 11 | Material, supplies, equipment and services | Clause 4.1 on page 192 of the ITAT paper book
Sub-clause (a) Contractor will furnish and maintain at its cost all items designated at Exhibit A hereto under the heading ‘Furnished by the Contractor’ |
Clause 4.1 on page 320 of the ITAT paper book
Sub-clause (a) Sub-contractor will furnish and maintain at its cost all items designated at |
| 12 | Personnel | Clause 4.2(a) submitted on page 192 of the ITAT paper book
Sub-clause 4.2 (a): The Contractor will at the time at its sole expense and under its exclusive responsibility arrange Driller, etc.)… |
Clause 4.2(a) of TDSIPL and TOIVL sub-contract on page 320 of the ITAT paper book
Sub-clause 4.2 (a): The Sub-contractor will at the time at its sole expense and under its exclusive responsibility arrange |
| 13 | Space at Nhava | Clause 4.3 on page 193 of the ITAT paper book
The operator may provide space at its Nhava Supply Base for transit storage of material required for carrying out drilling operations. It is agreed that the contractor shall remove their materials at their cost, within 30 days from the time of arrival of material from the space provided by the operator al Nhava. Any material being stored by contractor beyond 30 days, the operator would charge a ground rent as per Mumbai Port Trust rale applicable on the day of removal of material and will be recovered from any amount due to the contractor without giving any future notice… Further, the contractor shall obtain all necessary clearance from customs for storage and removal of materials from stores |
Clause 4.3 on page 321 of the ITAT paper book
The Contractor (subject to the operator providing) may provide space al its Nhava Supply base for transil storage of material required for carrying out drilling operations. It is agreed that the sub- contractor shall Any material being stored by sub-contractor beyond 30 days, the operator would charge a ground rent as per Mumbai Port Trust rate applicable on the day of removal of material and will be recovered from any amount due to the sub- contractor without giving any future notice… Further, the sub- contractor shall obtain all necessary clearance from customs for storage and removal of materials from stores |
| 14 | Independent Contractor Relationship | Clause 9.1 on B the ITAT paper book Sub-clause (a)
Contractor, directly and through its employees, shall perform all work connected with the Drilling operations herein contemplated. In the performance of this work contractor is an independent Contractor and is completely Sub-clause (b): Contractor shall at all times, have full responsibility for control, direction and supervision of operations being carried |
9.1 on page 325 of the ITAT paper book Sub-clause (a):
Sub-contractor, directly and through its employees, shall perform all work connected with the Drilling operations herein contemplated. In the performance of this work the Sub-contractor is an independent contractor and is completely responsible to control and execute the details of the work, Contractor /Operator being interested in proper execution and results obtained. The work be contemplated herein shall meel the approval of Contractor/Operator and be subject to the general rights of directions and inspection. Neither Sub-contractor’s employees nor employees of its sub-contractors, shall be considered employees of Sub-clause (b): Sub-contractor shall at all times, have full responsibility for control, |
| 15 | Representatives | Clause 9.2 on page 200 of the ITAT paper book Sub-clause (a}:
The actual performance and superintendence of all work hereunder shall be by Contractor. |
Clause 9.2 on page 326 of the ITAT paper book Sub-clause (a):
The actual performance and superintendence of all work hereunder shall be by -Sub- contractor. |
| 16 | Completion or Abandonment | Clause 10 on page 202 of the ITAT paper book Contractor agrees to perform all work necessary to drill, complete or abandon each well in the manner specified by Operator |
Clause 10 on page 327 of the 1TATpaper book Sub-contractor agrees to perform all work necessary to drill, complete or abandon each well in the manner specified by Contractor/Operator. |
| 17 | Drilling Unit Licenses | Clause 13.2 on page 204 of the 1TAT paper book
Contractor agrees that it shall secure permits and licenses for operations of the Drilling Unit in Indian Waters, if required and Contractor shall pay any expenses in this regard. It is the responsibility of the Contractor to obtain Naval Defence Clearance of Drilling Unit prior to commencement this Agreement from Ministry of Defence through Ministry of Petroleum and Natural Gas (India), at his cost. It is the responsibility ol the Contractor to obtain all necessary permissions and clearances from the statutory authorities, for operating the Drilling Unit in Indian waters, at his cost. Con tract 01 shall ensure that the Drilling Unit i.s classed and confirm that they would obtain permission /clearance of DG Shipping, wherever required for operating the Drilling Unit in Indian waters, at his cost. However, for obtaining Naval Defence Clearance and other necessary permissions and clearances from [lie statutory authorities, Operator shall issue forwarding tatterupon request from Contractor supported by all relevant valid documents. |
Clause 13.2 on page 328 of the IT AT paper book Sub-contractor agrees that il shall secure permits nnd licenses for operations of the Drilling Unit in Indian Waters, if required and Sub-contractor shall pay any expenses in this regard. Contractor confirms that it would assist the Sub contractor in obtaining Naval Defence C’learance of Drilling Unit prior to commencement of contract from Ministry of Defence through Ministry of Petroleum and Natural Gas (India), at Sub-contractor’s COM. However, for obtaining Naval Defence Clearance, and other necessary permissions and clearances for the statutory authorities, Contractor confirms that Operator shall issue forwarding letter upon request from Subcontractor supported by all relevant valid
Contractor confirms that it would assist the Sub-contractor in obtaining all necessary permissions and clearances from the concerned statutory authorities, for operating the Drilling Unit in Indian waters, at Sub-contractor’s cost. Sub-contractor shall ensure that the Drilling Unit is classed and confirm the they would obtain |
| 18 | Insurance | Clause 14 on pay e 204 of the 11 AT paper book
Sub-Clause 14.1: Contractor shall procure al Contractor’s expense and maintain with respect to and for the duration of this Agreement the insurance policies described below and with policy limits indicated below:
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Clause 14 on page 328 of the f TAT paper book
Sub-Clause 14.1: Sub- contract or shall procure at Sub- contractor’s expense and maintain with respect to and for the duration of this Agreement the insurance policies described below and with policy limits indicated below. » Workmen’s
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| 19 | Indemnity Agreements |
Clause 14.6 on page 206 of the ITAT paper book
A. Contractor agrees to protect, defend, indemnify and hold Operator its co- leases, its agents, if any, its other Contractor’s and/or their employees harmless from and against all claims, suits, demands and causes of action, liabilities, expenses, costs, liens, rights in rem, and B. Operator agrees to protect, defend, indemnify and hold Contractor and its sub- contractors, its agent and its affiliates, its other contractors and/or their employees harmless from and against all claims, suits, demands and causes of action, liabilities, expenses, costs, liens, rights in rem and |
clause 14.6 on page 330 of the ITAT paper book
A. Sub-contractor agrees to protect, defend, indemnify and hold B. Contractor (to the extent that Contractor receives an equivalent indemnity from Operator), agrees to protect, defend, indemnify: and hold Sub-contractor and its subcontractors, its agent and its affiliates, its other contractors and/or their employees harmless from and against all claims, suits, demands and causes of action, liabilities, expenses, costs, liens, rights in rem and judgements of every kind and character, without limit, which may arise in favour of Contractor, Contractor’s employees, Agents, invitees, contractors (other than Sub- contractor), or their employees, on account of bodily injury or death of Contractor’s employees, agents, invitees, contractors (other than Sub-contractor) or damage to said employees or its property (including any property of Contractor) as a result of the operations contemplated hereby, regardless of whether or not said claims, demands, or causes of action arise out of the negligence or otherwise in whole or in part, unseaworthiness or other faults, including pre existing conditions of Sub- contractor, its subcontractors, partners, Joint ventures, employees or agents. |
| 20 | Payment of Excise Duty, Vat/ Sales Tax, works Contract Tax and Service Tax |
Clause 15.5.1 Refer page 210 of the ITAT paper book 3 VAT/Sales Tax/ Works Contract Tax/ Excise Duty levied, if any, on materials/consumables will be to the account of Contractor. VAT/ Sales Tax/Works Contract Tax/ Excise Duty levied, if any, on charter hire payments received by the Sub- contractor, under this contract, will be to the account of Operator. |
Clause 15.1.1 Refer page 333 of the ITAT paper book VAT/Sales Tax/ Works Contract Tax/ Excise Duty levied, if any, on materials/consumables will be to the account of Sub-contractor. VAT/ Sales Tax/ Works Contract Tax/ Excise Duty levied, if any, on charter hire payments received by the Sub- contractor, under this contract, will be to the account of Contractor. |
| 21 | Termination for unsatisfactory Performance | Clause 22.5 Refer page 217 of the ITAT paper book
If the operator consider that the performance of the contractor is unsatisfactory or, not upto the standard, the operator shall notify the contractor in writing and specify the details… operator shall have the option to terminate the agreement by giving 30 days notice in writing to the contractor, if, the contractor fails to comply with the requisition contained in the said written notice issued by the operator. |
Clause 22.5 Refer page 337 of the ITAT paper book
If the operator consider the performance of the subcontractor is unsatisfactory or not upt o the expected standards and notifies the contractor about its dissatisfaction, the contractor shall notify the sub- contractor in writing and specify the details… Contractor shall have the option to terminate the agreement by giving 30 days notice in writing to the sub-contractor (provided |
| 22 | Verification of cha– racter and ante– cedents of contrac– tual manpower |
Clause 40 refer page 226 of the ITAT paper book
The contractor shall submit the documents to the operator prior to start of the work on the (1) |
Clause 41 refer page 344 of the ITAT paper book
The sub–contractor shall submit the documents to the operator prior to start of the work on the (1) |
8. The learned Authorised Representative submitted, as evident from various clauses of the agreement between ONGC and assessee vis–a–vis agreement between the assessee and A.Es, all functions and assets / equipments, mobilization of the rigs and personnel, inspection, guarantees, etc., were the responsibility of the A.E. and all the risk in regards to liquidity damages deficiency, performs, etc., shall lie with the A.E. He submitted, the entire responsibility, risk, liabilities under ONGC contract was transferred to its A.E. while the assessee only provided co– ordination and liaison services between ONGC and A.E. He submitted, for the purpose of execution of off–shore drilling operation, the contract with ONGC had specified minimum number of personnel to be employed per shift on each rig is 47 with at least two shifts running per day, whereas, the assessee had only seven employees on its pay–roll carrying out various administrative and co–ordination functions. In this context, the assessee referred to the relevant clauses of the contract as well as the salary paid by the assessee and its A.Es. for their respective activities which are as under:–
|
Salary paid by A.Es to its employees working on Rigs |
₹ 69,31,83,118 |
| Salary paid by assessee to its employees none of whom are posted on the Rigs | ₹ 1,87,45,991 |
| Percentage of salary paid by TDSIPL to salary paid by A.Es | 2.70% |
9. Refuting the observations of the Transfer Pricing Officer, that rig administrator and rig manager employed by the assessee were earlier on the pay–roll of A.Es, the learned Authorised Representative submitted that these two persons were on the pay–roll of the assessee to facilitate some technical co–ordination required between ONGC and A.E. It was submitted, these employees are not involved in actual drilling operation. He submitted, there are other rig manager on the rigs who are part of A.Es and are involved in drilling operation. In this context, learned Authorised Representative referred to the list of minimum employee captured in the agreement between the ONGC and the assessee at Page–277 of the paper book. Thus, it was submitted, the aforesaid facts substantiate assessee’s claim that it neither owned the rigs or equipment to be used for off–shore drilling nor it has the required personnel to carry out any drilling operation. It merely provided co–ordination / liaisoning services, hence, earned the mark–up on its own cost excluding the payment made to A.E. The learned Authorised Representative submitted, the assessee’s A.Es have been assessed to tax in India under section 44BB of the Act. It was submitted, the A.Es have also gone through the transfer pricing proceedings during the year under consideration wherein there transactions with the assessee are held to be at arm’s length price. He submitted, once the transactions with the assessee in the hands of the A.E. are held to be at arm’s length, the same arm’s length nature is to be upheld in assessee’s case. Learned Authorised Representative submitted, in A.E’s case, the DRP in the assessment year 2011–12, while considering the nature of work performed has recorded a categorical finding that the A.E is engaged in actual drilling operation through provisions of drilling rig and integrated services and such activities are in connection with prospecting, extracting or production of mineral oil by ONGC. Therefore, presence of intermediary like TDSIPL is not relevant. Thus, ultimately, DRP held that consideration received by the assessee from contract with TDSIPL is taxable under section 44BB of the Act. Learned Authorised Representative submitted, once the DRP in the case of A.E. had held that the A.E id engaged in actual drilling operation and the assessee is a mere intermediary, which decision of the DRP has been accepted by the Department, a contrary view cannot be taken in assessee’s case in respect of the very same income. Learned Authorised Representative submitted, in assessment year 2012–13, the Transfer Pricing Officer himself has acknowledged that assessee is acting merely as an intermediary between ONGC and its A.Es and has accordingly considered the payments made by the assessee to A.Es as pass through cost, which cannot be considered as part of the cost base of the assessee to compute the arm’s length price. Learned Authorised Representative submitted, as the assessee has been able to demonstrate that the responsibility agreed in the contract with ONGC were passed on completely to the A.Es in the back–to–back agreement effectively the various functions and underlying risk in relation to the same were also passed on to the A.Es. He submitted, the MoU / agreement between the assessee and the parent company and guarantee furnished by parent company are part of agreement with ONGC. Accordingly, the role of the assessee was merely to provide co–ordination and liaisoning services to its A.E. vis–a–vis ONGC contract while the A.E. carried out entire off–shore drilling operation including owning of the rigs and the personnel. He submitted, DRP in A.E’s case has categorically held the A.E. to be engaged in actual drilling operation and the assessee is a mere intermediary. It was submitted, on the face of the aforesaid facts, while carrying out functional analysis, the Transfer Pricing Officer has misdirected himself in holding that the assessee assumed significant risk. The learned Authorised Representative submitted, as the functions and the risk undertaken by the assessee in the contract with ONGC have been passed on to the A.E., the amount paid to the A.E. cannot be added back to the assessee’s cost. It was submitted, in order to apply TNMM, the assessee’s net profit margin realised from international transactions has to be calculated only with reference to cost incurred by it and not by any other entity. He submitted, rule–10B(1)(e), does not enable consideration of imputation of cost incurred by third party or unrelated enterprise to compute net profit margin of the assessee by applying TNMM. In support of such contention, learned Authorised Representative relied upon the following decisions:–
i) Li and Fung India Pvt. Ltd., 40 com 300 (Del.);
ii) FedEx Express Transportation and Supply Chain Services India Pvt. Ltd. v/s DCIT,, ITA no.435/Mum./2014;
iii) Cheil Communications India Pvt. Ltd., 11 com 205.
10. The learned Departmental Representative submitted, the Transfer Pricing Officer referring to the assessee’s transfer pricing study report has noted down various functions carried out by the assessee. Referring to the transfer pricing order he submitted, Transocean Group entity would not have got sub–contract if the assessee was not successful at the bid. He submitted, the ONGC required an Indian entity to bid, therefore, the Indian entity performed an important functions of contracting / bidding. The learned Departmental Representative relying upon the observations of the Transfer Pricing Officer submitted, this function is separate from liaisoning and co–ordination function, assistance in import, warehousing, accounting and document maintenance, invoicing in collection and other supporting functions. He submitted, the Transfer Pricing Officer bench marked the transaction for all the functions put together treating the assessee as risk bearing entity. He did not bench–mark the functions separately. In reply to the submissions of the assessee that in assessment year 2012–13, the Transfer Pricing Officer has accepted the payment made to sub–contractor as pass through cost, the learned Departmental Representative submitted, in assessment year 2012–13, the Transfer Pricing Officer has undertaken a detailed factual analysis and a separate bench marking of the functions have been undertaken. He submitted, while following separate bench marking approach of contracting / bidding function and that of liaisoning and support service, the Transfer Pricing Officer excluded sub– contracting cost. He submitted, in case sub–contract cost is to be excluded, the function of sub–contracting need to be remunerated at arm’s length price. Extensively referring to the observations of the Transfer Pricing Officer in the said order, the learned Departmental Representative brought out certain importent points as under:–
“a) FAR analysis revealed assessee was taking contracts and passing on the same to the AEs. This was done on back to back basis.
b) The assessee has received a remuneration for the specific services that it was performing in the liaisoning and co–coordinating activities. However, services that it performed in the form of procuring a contract and passing it on back to back has not been compensated.
c) The procurement of the contract and transferring the same to another entity for commercial reasons is a normal industry practice in many sectors. Same is done for a reduced contract or commission. In other words, the commission is a reward for bearing the initial incidence of a risk.”
4.9. Respectfully following the same, the ground Nos. 2-4 raised by the Revenue are hereby dismissed.
5. Ground No.1 raised by the Revenue and ground Nos. 7 & 8 raised by the assessee are with regard to inclusion and exclusion of certain comparables for benchmarking international transactions of the assessee.
(A) Inclusion of Agricultural Finance Corporation Ltd as comparable entity
The ld. CIT(A) observed that this company is found to be a consultancy and technical support company, although in agricultural field and accordingly held to be functionally comparable with that of the assessee company. Aggrieved by this inclusion, the Revenue is in appeal before us vide ground No.1.
The ld. DR before us drew our attention to the financial statements of the said comparable company enclosed in page 663 of the paper book wherein he drew our attention that the said comparable company was involved in project activities as major expenditure is only project expenses to the tune of Rs.40.99 Crores. Per contra, the ld.AR drew our attention to page 75 of the paper book wherein it is reflected that the said comparable company had earned consultancy income of Rs.56.42 Crores and that only the way of determining the consultancy income is based on projects undertaken by that comparable company. The ld. DR also submitted that the said comparable company is subject to audit u/s. 619 (4) of the Companies Act, 1956 by Comptroller and Auditor General (C & AG), which goes to prove that the said company is a Government company. The ld. DR placed reliance on the decision of the Hon‟ble Jurisdictional High Court in the case of CIT vs Thyssen Krupp Industries India Pvt Ltd reported in 68 taxmann.com 248 (Bom) wherein it was held that when a substantial part of the Revenue of comparable company in execution of turnkey projects arise out of executing projects of public sector undertakings, it cannot be considered to be comparable to assessee company providing turnkey services to its AE as contracts between public sector undertakings were not driven by profit motive alone and other consideration also weigh in such as discharge of social obligations etc. To buttress this argument, the ld. AR drew our attention to the order of the ld. TPO at page 10 thereon wherein, the ld. TPO himself had included Apitco Ltd as one of the comparables, which is also a Government company. The ld. AR, though, in principle, agreed that Government company cannot be a good comparable in view of the decision of the Hon‟ble Jurisdictional High Court referred supra, submitted that the said principle cannot be made applicable to the facts of the instant case in view of the fact that the ld. TPO himself had considered a Government company as a good comparable.
It is a fact on record that Apitco Ltd is a Government company which has been included as a good comparable by the ld. TPO. It is also pertinent to note that inclusion of a Government company as a good comparable i.e. Apitco Limited is not disputed by the assessee before us. While this is so, the ld. DR before us cannot try to make out a new case beyond what has been done by the ld. TPO/AO. Hence, rejection of Agricultural Finance Corporation Ltd as a good comparable cannot be done merely because it is a Government company in the peculiar facts and circumstances of the instant case. There is absolutely no dispute that Agricultural Finance Corporation Ltd is functionally comparable with that of the assessee. Hence, we hold that the ld. CIT(A) has rightly included Agricultural Finance Corporation Ltd as a good comparable in the facts and circumstances of the instant case. The ld. TPO/AO is directed to include the same as a comparable.
(B) Inclusion of Office Care Services Ltd as comparable
The assessee has raised the ground No.7 in its cross objections seeking to include Office Care Services Ltd as a good comparable with that of the assessee company. The ld. CIT(A) had ignored this comparable on the ground that the annual report of the said comparable company does not contain any mention on nature of services rendered by them. The assessee had actually given a screenshot of website of the said comparable which mentions various services rendered. In fact this screenshot was filed by the assessee before the ld. CIT(A) vide letter dated 28/01/2019 which is enclosed in pages 814-816 of the paper book. The ld. DR objected to the inclusion of the said comparable company as the details mentioned in the website of any company could not be relied upon as an evidence and he also drew our attention to the annual report of the said comparable company which does not mention anything about the nature of services rendered and functions performed by them. Per contra, the ld. AR stated that assessee had taken broader compatibility as business support services and that similar services were rendered by BVG India Ltd which has been included by the ld TPO as a good comparable and hence, he pleaded that Office Care Services Ltd also should be included as a comparable.
We have gone through the TPSR of the assessee which is enclosed in pages 1-48 of the paper book. In page 22 thereon, the assessee had sought to include Office Care Services Ltd as a good comparable with the assessee wherein the „Data Source‟ relied upon is the annual report of the said comparable company. It is not in dispute that the annual report of the said comparable company does not specify the nature of functions performed by that company. Hence, even at the time of benchmarking done by the assessee itself, the assessee had not bothered to obtain any other evidence to bring on record the nature of functions performed by the said comparable company to include the same in the list of comparables. It is very well settled that the information mentioned in the website of any company is only for their performance and cannot be relied upon by any statutory authority or by any Court. Hence, we are in agreement with the argument advanced by the ld. DR on this issue. Accordingly, we hold that the ld. CIT(A) was justified in rejecting this company as a good comparable with the assessee for want of details of functions performed by the said comparable. Hence, the ground No.7 raised by the assessee in its cross objections is dismissed.
(C) Inclusion of Vatika Marketing Ltd:–
The assessee has raised ground No.8 in its cross objections seeking for inclusion of the aforesaid comparable company. The ld. AR before us stated that the said comparable company is engaged in providing project maintenance services and segmental details are not available and hence, submitted fairly that the said comparable should be excluded from the final list of comparables. We are in agreement with the arguments advanced by the ld. AR and accordingly we hold that Vatika Marketing Ltd has been rightly rejected in the final list of comparables. Hence, the ground No.8 raised by the assessee in its cross objections is dismissed.
6. The ground No. 5 &6 raised by the Revenue are general in nature and does not require any specific adjudication.
7. The ground Nos. 1 to 4 raised by the Revenue are dismissed.
8. In the result, the appeal of the Revenue is dismissed.
9. The ground No.9 raised by the assessee in its cross objection is seeking exclusion of notional foreign exchange loss incurred by the assessee while considering the actual cost on which margin of 10% has been added by the assessee for recovery from the AE.
9.1. We have heard rival submissions and perused the materials available on record. We find that the assessee has debited the following three expenses in its profit and loss account:-
(a) Employee Benefit Expenses – Rs. 53,68,349/-
(b) Other Expenses – Rs.1,65,43,025/-
(c) Exchange Loss – Rs.4,13,05,616/-
9.2. We find that there is no dispute on the mark-up of 10% claim by the assessee on the expenses reflected in (a) & (b) above from its AEs. The only dispute is that though the assessee has debited exchange loss of Rs.4,13,05,616/- in its profit and loss account, it had not claimed mark-up on that to the extent of 10% from its AE during the year under consideration on the ground that the same is actually not incurred and is merely notional exchange loss and that it had resulted due to restatement of the pending liability as on the balance sheet date to comply with Accounting Standard-11 issued by the Institute of Chartered Accountants of India (ICAI). In this regard, the ld. AR drew our attention to the undisputed fact that the assessee has back to back arrangement with its AE; that the entire contact services are rendered only by the AE to ONGC; that the assessee receives the contract revenue in US$ from ONGC and immediately passes on the same to its AE in US$. The said exchange loss is only arising due to re-statement of the pending dues from ONGC as on 31/03/2012, since the accounts of India are to be reflected in Indian Rupees. This re-statement of the figures had been done only to comply with the Accounting Standard-11 issued by ICAI and this figure has got absolutely no relevance with the assessee as such, for the purpose of taxation and the transfer pricing regulations, in view of the fact that the entire exchange fluctuation risk is to be borne only by the AE and not by the assessee. The assessee is merely a pass through entity of collecting the US$ from ONGC and passing on the same to AE pursuant to back to back arrangement. Since this exchange loss is purely notional, the assessee has chosen not to get it reimbursed from its AE during the year under consideration. The ld. AR also stated that any exchange loss incurred actually by the assessee at the time of actual settlement of bills has been duly reimbursed by the AE to the assessee. Hence, we hold that assessee was duly justified in not adding mark-up of 10% on this exchange loss considering the fact that it is purely notional in nature in the peculiar facts and circumstances of the instant case. Accordingly, the ground No.9 raised by the assessee in its cross objections is allowed.
10. The ground No.10 raised by the assessee in its cross objection is challenging the action of the ld. AO and ld. CIT(A) in determining the ALP on account of reimbursement and recovery of expenditure by adding 10% mark-up thereon.
10.1. We have heard rival submissions and perused the material available on record. We find that assessee in its TPSR had stated the following with regard to reimbursement and recovery of expenses:-
|
Sr. No. |
Name of the AE | Description of services/transactions with the AE | Total Amount Paid/payable to the AE | Total amount received / receivable from the AE |
| 1 | Transocean Inc | Reimbursement of cargo costs, stock based compensation expenses of employee, freight charges etc | 1,630,485 | |
| 2 | R & B Falcon (A) Pty. Ltd | 8,584 | ||
| 3 | Transocean Offshore Deepwater Drilling Inc. | 355,267 | ||
| 4 | Transocean RIG 140 Limited |
Recovery of bid bond expenses | 8,11,989 |
10.2. The ld. TPO had observed that assessee had reimbursed expenses to AE towards travel, accommodation, conveyance, communication charges, cargo costs, stock based compensation, employee expenses, freight charges etc. without any mark-up. The assessee submitted that these transaction values represent third party costs recovered by the AEs from the assessee company without any margin. The ld. TPO had observed that assessee was asked to produce the invoices for these expenses which were not submitted by the assessee. The ld. TPO observed that since assessee is not carrying on any contract activity in India and hence, there is no need for it to realize the cargo expenses, freight expenses, employee benefit expenses, stock compensation expenses costs etc. to the AE, especially when the assessee has involved only in coordinating and liasoning services. Hence, the ld. TPO determined the ALP of this transaction at Rs.Nil and made adjustment of Rs.19,94,336/- on account of reimbursement of expenses.
10.3. The ld. AR pleaded that these expenses were already included as part of operating cost by the assessee on which 10% mark-up has already been done by the assessee. Moreover, out of the total 19.94 lakhs, the major expenditure of Rs.16,00,000/- is towards employees cost and ESOP expenses given by the parent to the employees. The ld. AR also drew the attention of this Bench to page No.3 of its ld. TPO order wherein the role of the assessee has been mentioned by stating that the assessee performed the following functions:-
(a) Contracting / Bid
(b) Liasoning and Co-ordination
(c) Assistance in import of equipments and warehousing
(d) Accounting and documents maintenance
(e) Invoicing and collection
(f) TDSIPL i.e. assessee performs other support administrative activity that would enable the Transocean group entities to execute the contract efficiently.
10.4. When the transaction is in the reimbursement of expenses to AE, the third party cost incurred is a Comparable Uncontrolled Price (CUP) for reimbursement. Accordingly, the CUP method chosen by the assessee considering the nature of transaction and degree of comparability as the Most Appropriate Method, is hereby upheld.
10.5. We find that either way all these expenses have been duly included in the total expenses included by the assessee on which mark-up of 10% has been claimed by the assessee from its AE. Hence, the action of the ld. TPO in determining the ALP of this transaction at „Nil‟ is absolutely without any basis and the adjustment proposed in the sum of Rs.19,94,336/- is hereby directed to be deleted.
10.6. With regard to recovery of expenses in the sum of Rs.8,11,989/-, this represent expenses incurred by the assessee company on behalf of AE towards Bid bond expenses. These expenses were also recovered by the assessee from its AE with markup of 10%. Hence, the reasoning given by us hereinabove for reimbursement of expenses would apply for this issue of recovery of expenses also. Hence, we dismiss the action of the ld. TPO in determining the ALP of this transaction at Nil and consequentially direct for deletion of adjustment made in the sum of Rs.8,11,989/-towards recovery of expenses. Accordingly, the ground No.10 raised by the assessee in its cross objection is allowed.
11. In the result, the cross objection of the assessee is partly allowed.
12. To Sum-up, the appeal of the Revenue is dismissed and cross objections of the assessee is partly allowed.
Order pronounced on 28/03/2023 by way of proper mentioning in the notice board.
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