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TMI Blog2017 (1) TMI 1815X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 India, to enter into contract with ONGC, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 determined by considering the gross revenue received from ONGC. In response to the show cause notice, though, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erstood 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 agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-contractor. However, he submitted, the approach followed by the Transfer Pricing Officer in assessment year 2012-13 is much more scientific, hence, required considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the experience criteria and financial capability, to bid for the work subject to condition that it is a 100% subsidiary of a parent company which itself meets the experien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, we have not found any conclusive finding by the Transfer Pricing Officer or DRP that the assessee is the owner of the rigs or owns the required equipment / machinery and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BB 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 connected with prospecting, extraction of production of mineral oil, the payments received by the non-resident assessee or foreign companies under the said contracts is more appropriately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Pricing Officer for bench marking the services relating to bidding and assignment of contract function. Undisputedly, neither the Transfer Pricing Officer nor DRP have raised a whisper on the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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