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2023 (4) TMI 191
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.... 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:- 1. "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 a....
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....pany 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 co....
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....elf 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 p....
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.... 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 tran....
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....nt 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 be....
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....corporated 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 Rs. 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 a....
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....C. 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 Ass....
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.... 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 equip....
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....nd 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. No. Particulars ONGC and TDSIPL Contract (J.T. Angel) TDSIPL and TOIVL 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 terminate the contract. Sub-clause (f) If the Contractor is unable to mobilize/ deploy the Drilling Unit and commence ....
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....erator for extension of time with unconditionally agreeing for the payment of liquidated damage, a sum equivalent to 0.5% of the annual contract value, for each week of delay or part thereof subject to maximum of 5% 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 period... Contractor (subject Sub clause (c) If the Sub-contractor is unable to mobilize the Drilling Unit and commence operation within specified period, the Contractor may request Operator for extension of time with unconditionally agreeing For payment of liquidated damages. Upon receipt of such a request, Operator extends the period of mobilization and recovers from the Contractor liquidated damages a sum equivalent to 0.5% of the annual contract value, for each week of delay or part thereof subject to a maximum of 5%, then the Contractor shall be entitled to recover the said amount of liquidated damages from Sub-contractor. 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 thr....
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....equipped and adequate to drill wells in terms of agreed specifications and complete the same.... The drilling unit and all other equipment, materials and supplies provided by contractor by the contractor, as specified or which the contractor is otherwise required to provide under the terms of this agreement... Clause 2.2 Contractor confirms that the drilling unit shall be capable of drilling unit be capable of drilling wells upto 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-contractor hereunder, shall be fully equipped and adequate to drill wells in terms of agreed specifications and complete the same.... The drilling unit and all other equipment, materials and supplies provided by sub- contractor by the contractor, as specified or which the contractor is otherwise required to provide under the terms of this agreement... Clause 2.2 Sub-contractor confirms that the drilling unit shall be capable of drilling unit be capable of drilling wells upto a maximum depth of 6000 meters 6 Hull Structure Clause 3.5 on page 189 of the ITAT paper book Contractor shall be required to carr....
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....rminate this agreement by giving 30 days notice... 8. Personnel Mobilization Clause 3.8 on page 191 of the ITAT paper book lization ...In the event there is a change in location... and Contractor shifts its office to new location, Operator shall pay all reasonable expenses thereby incurred in moving a maximum of 4 of the Contractor's Shore base personnel, and Contractor's onshore equipment, material, supplies and related items located therein, from original location to new location such transaction being limited to surface/ sea transportation charges only. Contractor shall be responsible for providing all other requirement of its personnel... Clause 3.8 on page 319 the ITAT paper book In the event there is a change in location, Contractor [subject to Operator making payment to Contractor] shall pay all reasonable expenses thereby incurred in moving a maximum of 4 of the Sub-contractor shore base personnel, and Contractor's onshore equipment, material, supplies and related items located therein, from original location to new location such transaction being limited to surface/ sea transportation charges only. Sub-contractor shall be responsible for pr....
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....r the guarantee to invoke the said guarantee with the bank and claim the amount from the bank and forfeit the same. The bank shall be obliged to make the payment to the Operator on demand. The Contractor further agrees to extend the period of this guarantee or to furnish a fresh guarantee if the Operator decides to the extend the period of this Agreement a stated in the Article 1.3. 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 unconditional Performance Guarantee issued by Sub-contractor's parent Company namely Transocean Inc. with validity upto the expiry or termination of the said Contract. In the event of the Sub-contractor failing to honour any of the end commitments entered into 13. e under this Agreement and/or in respect of any amount due from Sub-contractor to the Contractor, the Contractor shall have the unconditional option under the guarantee to invoke fthe said Performance Guarantee with Transocean Inc. and claim the amount from Transocean Inc. and forfeit the same. Transocean Inc. shall be obliged to make the payment to the Contractor upon demand Notwithstanding the invocation....
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....ance 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 remove their materials at their cost within 30 days from the time of arrival of material from the space provided by the operator at Nhava. 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 res....
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....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. Contract 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 tatter upon 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 ....
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....ion, 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, sub-contractors or their employees, on account of bodily injury or death of Contractor's employees, agent, sub- contractor's employce or damage to said employee's property as a result of the operations, contemplated hereby, regardless of whether said claims, demands, or causes of action arise out of negligence or otherwise, in whole or in part, unseaworthiness or other fault, including pre-existing conditions of Operator, its contractors other than the Contractor, sub- contractors, partners, Joint Ventures, their employees or agents. 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 judgements of every kind and character, without limit, which may arise in favour of Operator, Operator's employees, Agents, invitees, contractors (ot....
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....actor) 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 contrac....
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....forms, 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 Rs. 69,31,83,118 Salary paid by assessee to its employees none of whom are posted on the Rigs Rs. 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 Authoris....
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....ssment 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....
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...., 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 transferrin....
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....tc. 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 absolu....
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....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....
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....ng 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 / tra....