TaxTMI 
TaxTMI 
2023 (4) TMI 191
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....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:- 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 ....
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.... 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....
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....rnational 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 ....
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.... 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 i....
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....s 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 c....
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....e 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 Rs. 68,61,523. The Assessing Officer having noticed that the assessee had entered into international transactions with its A.E.....
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....erefore, 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. T....
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.... 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 ....
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....ve 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. 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 day....
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....n 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 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 con....
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....e 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 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- con....
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....he general standard of performance of work hereunder be materially 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 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, C....
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....l 2010 for US$ 1,724,490.32 (U.S. Dollars One Million Seven 1 Hundred Twenty-Four thousand Four hundred Ninety and Thirty Two cents only) with validity of 15th December, 2013. The Contractor agrees to extend the validity of the Performance Bank Guarantee so as to be valid up to 60 days beyond the last date primary term of Agreement or extension entered into under this Contractor to the Operator, the Operator shall have the unconditional option under 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 honou....
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....ontractor 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 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 ....
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....nd 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. Contract 01 shall ensure that the Drilling Unit i.s ....
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....s described below and with policy limits indicated below. » Workmen's compensation and employees' liability insurance * Comprehensive general liability insurance * Marine insurance * Comprehensive general automobile liability * Protection and indemnity liability 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 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-ex....
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....o 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/ Wo....
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....f the work on the (1) character and ante-cedents of the per-sons(s) proposed to be deployed (2) they have scrutinized the previous work of the persons(s) proposed to be deployed (3) certified photocopies of police verification certificate. 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 c....
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....th 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 bac....
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....arned 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 ....
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....neral (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 cas....
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.... 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....
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....ices 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 ....
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....en 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 expe....