TaxTMI 
TaxTMI 
2017 (1) TMI 1815
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.... 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 natura! 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 hid 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 Ind....
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....ficer on examining the annual report for the relevant previous year, however, found that the assessee had entered into following transactions with Sub-contracting costs paid Rs 369,40,07,189 Recovering of expenses received Rs.4,80, 58,593 Reimbursement of expenses paid Rs. 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 Rs 410,59,77,730. The assessee has reduced therefrom service tax of Rs 34,82,10,146, and sub-contractor cost of Rs 369,40,07,189 and has shown net revenue of Rs 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 dete....
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....ard transfer Pricing adjustment of Rs 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 Se....
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....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 14^th 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., 14^th April 2010. He submitted, the agreement between ONGC and the assessee captured the rights and responsibility of each entity, He submitted, ....
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....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 ....
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.... 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 taxmann.com 300 (Del.); il) 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 taxmann.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 ....
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....ed, in reply to the show cause notice issued by the Transfer Pricing Officer to bench mark the services rendered for procurement and assignment of contract at 2%, the assessee had made a without prejudice submissions that as per industry norm, the commission for procurement and assignment of contract can be bench marked @ 1%. He submitted, after considering the reply of the assessee, the Transfer Pricing Officer in assessment year 2012-13 had computed arm's length price of assignment of contract at 1.56% of the contract value and proposed the same as adjustment. The learned Departmental Representative submitted, in assessment year 2012-13, the Transfer Pricing Officer had bifurcated the functions of the assessee into two categories i.e., (i) procuring and assignment of contract; (ii) provisions of support service. Bench marking was done separately for each of the functions and in this context, the Transfer Pricing Officer had excluded the sub-contract amount as pass through cost. The learned Departmental Representative submitted, in the impugned assessment year, since the Transfer Pricing Officer had done combined bench marking, there was no occasion to exclude the cost of sub-....
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....s the claim of the assessee that such Sub-contracting cost paid to the assessee is a pass through cost, hence, should not form part of operating cost of the assessee, the Transfer Pricing Officer has included it in the operating cost of the assessee. Before deciding the issue, it is necessary to reiterate certain undisputed facts. The entities comprising of Transocean Group are world's largest off-shore drilling contractors and were providing such services to ONGC from the earlier years. However, in the tender floated for charter hire of seven drilling rigs in the year 2008 ONGC put a new condition in section 2 of the bid document as per which multiple entities of the same group were prevented from bidding for the tender to avoid artificial cartelization. Due to the aforesaid pre-condition imposed by ONGC, the entities of the Transocean Group incorporated the assessee company in India to bid for the work and enter into contract with ONGC. It is necessary to mention, as per the terms and conditions of the bid document, the bidder should be an off-shore drilling company having minimum three years experience. However, the bid document permitted a bidder who, even though does not meet ....
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....ub-contracted the work to the A.Es under the same terms and conditions on back-to-back basis. As could be seen, the entire scope of work under the contract along with the responsibility, risk and liabilities was transferred to A.Es, while, the assessee only provided co-ordination and liaison services between the ONGC and A.E. On a reference to the audited financial statement submitted in the paper book it is observed that the assessee is not Owning any asset required for executing the work of off-shore drilling Operation awarded by the ONGC under the contract nor does it have the required number of personnel to carry out the off-shore drilling operation. It is observed, as per the stipulations of the contract, number of personnel to be employed in the rig per shift is 47 with at least two shifts running per day. The contract also provided for recovery of amount for short deployment of personnel on the rig. Whereas, the number of personnel employed by the assessee is only seven. Further, there is a huge disparity between the Salary paid to the employees by A.Es and salary paid by the assessee to its employees. Further, on a perusal of the order passed by the Departmental Authorities....
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....act is with ONGC for provision of drilling rig and integrated services. ONGC is a member of a production sharing contract. The A.O. has computed profits from this contract u/s 44BB of the Act and there is no dispute to this extent. Another contract is with TDSIPL for provision of drilling rig and integrated services. TDSIPL in-turn has entered into contract for the same with ONGC and thus TDSIPL is not a member of a production sharing contract to section 44BB of the Act. 6.2 It is undisputed that the assessee is engaged in actual drilling operation through the provision of drilling rig and integrated services. Such activities are in connection with prospecting, extraction or production of mineral oil by ONGC. Presence of intermediary like TDSIPL is not relevant. Provision of the section 44BB do not require that payee should be a member of production Sharing contract. The only requirement is that services / facilities Should be in connection with prospecting for or extraction or production of mineral oils. In a recent decision of Hon'ble Supreme Court in case of ONGC v/s CIT, it has been held that where the pith and substance of the contract / agreement is inextricably conn....
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....in assessee's case for assessment year 2012- 13, there cannot be any manner of doubt in coming to the conclusion that the sub-contract payment made by the assessee to its A.E. was merely in the nature of pass through cost as the assessee has passed on the work of off-shore drilling operation to its A.Es on back-to-back basis and it has acted merely as an intermediary in obtaining the contract and passing on the same to the A.E. and for which it has been remunerated on cost plus mark-up basis by the A.E. In view of the aforesaid factual position arising from the materials on record, we hold that sub-contract payment of Rs 369,40,07,189, cannot be considered as part of the operating cost of the assessee for determining the arm's length price. Accordingly, we direct the Assessing Officer to determine the arm's length price of the international transaction relating to the provision of Support service by the assessee to its A.E. after excluding the sub-contracting cost paid to A.E. of Rs 369,40,07,189, from its cost base. At this stage, we deem it appropriate to deal with the submissions of the learned Departmental Representative for remitting the issue back to the Transfer Pric....
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....ation nominated by ONGC 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 terminated. Sub-clause (f) If the Contractor is unable to mobilize/ deploy the Drilling Unit and commence the operation with the period specified... it may request Operator for extension of the time with unconditionally agreeing for the payment of liquidated damages... which shall 0.5% of the annual contract value... for each week of delay or part thereof subject to maximum of 5%. Sub-clause (f) 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 agreeing for payment of liquidated damages. Upon receipt of such a request, if the Operator extends the period of mobilization and recovers from the Contractor liquidate....
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.... part thereof subject to maximum of 5%. TDSIPL and TOIVI contract (J.T. angel) (Sub-contact) 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. Clause 1.6 on page 185 of the ITAT paper book Clause 1.6 of on page 315 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 1.6.1; 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: Operator will accept the Drilli....
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....contractor by the contractor, as specified or which the contractor is otherwise required to provide under the terms of this agreement... | Clause 2.1, sub-clause (b) on page 316 of the ITAT paper book 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... Document 5 SR No. Particulars 6. Hull Structure ONGC and TDSIPL Contract (J.T. Angel) 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 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 fro....
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.... 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... Personnel Mobilization Clause 3.8 on page 191 of the ITAT paper book ...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 of ....
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.... 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. 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 Document 8 ST Particulars No. 11. Material, supplies, equipment and services ONGC and TDSIPL Contract (J.T. Angel) validity of 15th December, 2013. The Contractor agrees to extend the validity of the Performance B....
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....the time at its sole expense and under its exclusive responsibility arrange supervisor, technical, other personnel to properly perform the work, in the numbers and categories as specified in the contract (such as Drilling Superintendent, Chief Mechanic, Subsea Engineer, Asst. Subsea Engineer, Driller, Asst. Driller, etc.)... TDSIPL and TOIVL contract (J.T. angel) (Sub-contact) Sub-clause 4.2 (a): The Sub-contractor will at the time at its sole expense and under its exclusive responsibility arrange supervisory, technical, other personnel to properly perform the work, in the number and categories as specified in the contract ( such as Drilling Superintendent, Chief Mechanic, Subsea Engineer, Asst. Subsea Engineer, Driller, Asst. Driller, etc.)... 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 ....
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....ly 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 contemplated herein shall meet 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 Contractor/Operator. Sub-clause (b): Contractor shall at all times, have full responsibility for control, direction and supervision of operations being carried out under this Agreement except when and to the extent that the Operator assumes control and supervision of operation. Sub-clause (b): Sub-contractor shall at all times, have full responsibility for control, direction and supervision of operations being carried out under this Agreement except when and to the extent t....
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....rance ONGC and TDSIPL Contract (J.T. Angel) authorities, for operating the Drilling Unit in Indian waters, at his cost. Contractor shall ensure that the Drilling Unit is 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 the statutory authorities, Operator shall issue forwarding letter upon request from Contractor supported by all relevant valid documents. Clause 14 on page 204 of the ITAT paper book Sub-clause 14.1: Contractor shall procure at 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 compensation and employees' liability insurance Comprehensive general liability insurance Marine insurance TDSIPL and TOIVL contract (J.T. angel) (Sub-contact) permissions and clearances for the statutory authorities, Contractor con....
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....lt, including pre-existing conditions of Operator, its contractors other than the Contractor, sub- contractors, partners, Joint the ITAT paper book A. Sub-contractor agrees to protect, defend, indemnify and hold Contractor/Operator its co- leases, its agents, if any, its other contractors (other than Sub-contractor) 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 Sub-contractor, Sub-contractor's employees, agents, its subcontractors or their employees; on account of bodily injury or death of Sub-contractor's employees, agent, subcontractor's employee 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, un- seaworthiness or other fault, including pre-existing conditions of Contractor/ Document 14 ONGC and TDSIPL ....
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....ther 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- Document 15 Sr. NO. Particulars 20. Payment of Excise Duty, Vat / Sales Tax, Works Contract Tax And Service Tax ONGC and TDSIPL Contract (J.T. Angel) Joint Venturers, employees or agents. Clause 15.5.1 Refer page 210 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 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. TDSIPL and TOIVI contract (J.T. angel) (Sub-contact) contractor, its subcontractors, partners, Joint Venturers, employees or agents. 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- con....