TMI Blog2017 (1) TMI 1815X X X X Extracts X X X X X X X X Extracts X X X X ..... t the AO 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. from its cost base. In the course of hearing as well as in the written submission, it was submitted by the learned Authorised Representative if the sub-contract cost paid to the A.E. is not included in the cost base, the margin of the assessee would be higher than the margin of comparables considered by the Transfer Pricing Officer himself. Hence, the issue relating to comparables need not be gone into. As we have accepted assessee s claim in relation to non-inclusion of sub-contract cost paid to the A.E. in the cost base of the assessee, the other issues relating to comparability analysis having become academic in nature, we do not intend to adjudicate them. - Shri Rajendra Accountant Member And Shri Saktijit Dey Judicial Member For the Appellant : Shri Porus Kaka a/w And Shri Divesh Chawla For the Respondent: Shri N.K. Chand ORDER PER SAKTIJIT DEY, J.M . Captioned appeal at the instance of the assessee is directed against the order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnel for execution of contract with ONGC. For the impugned assessment year, the assessee filed its return of income on 25 th 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 audit report submitted by the assessee in Form no.3CEB, noticed that the assessee has reported the following international transactions:- i) Provision of support services Rs.6,37,60,397 ii) Reimbursement of expenses Rs.298,773 4. On examining the transfer pricing study report submitted by the assessee Transfer Pricing Officer noticed, assessee claimed to have provided only the following support services to Transocean Group entities which are undertaking drilling activities: - i) Contracting / Bid; iii) Liaisoning and Co-ordination; iv) Assistance in import of equipments and warehousing; iv) Accounting and document maintenance; and v) Invoicing and colle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee are very broad and it is not involved merely in liaisoning and co-ordination work. He observed, the A.E. had deputed its experts to the assessee who were earlier in the Pay-roll of A.Es. He observed, if the assessee is not involved in operation of the rig and drilling work there was no need for employing rig administrator and rig manager. The Transfer Pricing Officer observed, as the assessee carries out co-ordination, liaisoning, marketing and sourcing function and is also undertaking various risks, it should be entitled to share of profit on the entire value of contract and not mere mark-up on the cost incurred. The Assessing Officer observed, assessee has to Pay all the taxes and in case of change of location, the assessee has to bear the expenditure incurred in shifting sub-contractor s Equipment, personnel to the new location. Thus, the assessee is a full fledged risk taking entity. He observed, the A.E. could not have got the subcontract if the assessee would not have been there. As far as comparables selected by the assessee are concerned, the Assessing Officer rejected them and proceeded to select two comparables viz. ICRA Consulting Services Ltd. and Cyber Media Resea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bidder itself did not meet the experience and financial capabilities criteria it can still bid for the tender, provided, the parent company of the bidder fulfills / satisfies the criteria of experience and financial standing. In this context, the learned Authorised Representative drew attention of the Bench to the relevant clauses of the bid document. He submitted, as the assessee did not have relevant assets / rig or experience or requisite personnel to perform drilling Operation, ONGC awarded contract to the assessee on the financial and technical Capabilities of its parent / A.Es who Owned the required drilling equipments / rigs and personnel for execution of the contract with ONGC. He submitted, these facts can be clearly established from various documents / agreements entered into with ONGC as well as A.Es. He Submitted, as per the memorandum of understanding between assessee and TOIVL, which is also part of the agreement between ONGC and assessee, it confirms that the A.Es are the owner Of drilling unit and the same will be made available for the ONGC contract. The said memorandum of understanding would be valid for the entire duration of the contract and any extension th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and A.Es as under:- 8. The learned Authorised Representative submitted, as evident from various clauses of the agreement between ONGC and assessee vis-a-vis agreement between the assessee and A.Es, all functions and assets / equipments, mobilization of the rigs and personnel, inspection, guarantees, etc., were the responsibility of the A.E. and all the risk in regards to liquidity damages deficiency, performs, etc., shall lie with the A.E. He submitted, the entire responsibility, risk. liabilities under ONGC contract was transferred to its A.E. while the assessee Only provided co-ordination and liaison services between ONGC and A.E. He submitted, for the purpose of execution of off-shore drilling operation, the contract with ONGC had specified minimum number of personnel to be employed per shift on each rig is 47 with at least two shifts running per day, whereas, the assessee had only seven employees on its pay-roll carrying out various administrative and co-ordination functions. In this context, the assessee referred to the relevant clauses of the contract as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal Representative relying upon the observations of the Transfer Pricing Officer submitted, this function is separate from liaisoning and co-ordination function, assistance in import, warehousing, accounting and document maintenance, invoicing in collection and other supporting functions. He submitted, the Transfer Pricing Officer bench marked the transaction for all the functions put together treating the assessee as risk bearing entity. He did not bench-mark the functions separately. In reply to the submissions of the assessee that in assessment year 2012-13, the Transfer Pricing Officer has accepted the payment made to sub-contractor as pass through cost, the learned Departmental Representative submitted, in assessment year 2012-13, the Transfer Pricing Officer has undertaken a detailed factual analysis and a separate bench marking of the functions have been undertaken. He submitted, while following separate bench marking approach of contracting / bidding function and that of liaisoning and support service, the Transfer Pricing Officer excluded sub-contracting cost. He submitted, in case sub-contract cost is to be excluded, the function of sub-contracting need to be remunerated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost then, as a natural corolary it would be appropriate to bench mark the service relating to bidding and assignment of the contract. He submitted, since the aforesaid aspect was not considered by the Transfer Pricing Officer in the impugned assessment year the issue may be restored back to the file of the Transfer Pricing Officer for fresh bench marking by separating the functions as was done by him in assessment year 2012-13. 12. In rejoinder, the learned Authorised Representative vehemently opposing the request of the learned Departmental Representative to restore the issue to the file of the Transfer Pricing Officer submitted, the issue on which the learned Departmental Representative wants the matter to be restored back to the file of the Transfer Pricing Officer, neither arise out of the order of the Transfer Pricing Officer nor is a subject matter of appeal. The learned Authorised Representative submitted, the finding of the Transfer Pricing Officer in assessment year 2012-13 in relation to the provisions of marketing services has been challenged by the assessee in the relevant assessment year and has to be dealt in those assessment years. However, there are no such find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d document also provide, in such event as the subsidiary company is dependent upon the experience and financial capability of the parent company, with a view to ensure commitment and involvement of the parent company for successful execution of the contract, the bidder should enclose an agreement in the prescribed form between the parent and subsidiary company and also furnish corporate guarantee from the parent company to ONGC for fulfilling the obligation under the agreement. In the present case, though, the assessee admittedly, did not had the relevant assets / rigs or experience to perform the drilling operation, however, on the basis of experience and financial capability criteria of the parent company of the assessee, ONGC awarded the contract to the assessee. It is also a fact on record that in terms of the conditions of the bid document, the assessee submitted, agreement between the assessee and the parent company (TOIVL) confirming that the A.Es are owner of drilling unit and the same will be made available for the ONGC contract. The agreement between the assessee and parent company also provided that both the entities mutually agreed that the assessee while submitted an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it would not be appropriate to conclude that entire contract receipt is of the assessee. For the same reason, only because the payments were made to the assessee by ONGC and assessee has paid service tax, it does not mean that it has executed the work. In fact, it is not the case of the Department that the off-shore drilling operation was not executed by the A.Es. The reasoning of the Transfer Pricing Officer is, but for the assessee A.Es would not have got the sub-contract. Therefore, in case of assessee sub-contract cost cannot be considered as a pass through cost. He further observed, the assessee was not merely providing co-ordinate and liaisoning service but also providing marketing and sourcing functions for which it is entitled to be remunerated by way of share in the profit of the total contract value and not only a mark-up on its cost. When, admittedly, the assessee has not undertaken the off-shore drilling work and the entire work was sub-contracted to the A.Es on back-to-back basis and the payment for such work was made to the A.Es on back-to-back basis, there is no reason to conclude that the assessee should get a share out of such sub-contract payment when undisputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the Act. 6.3 In view of above, the panel is of the view that consideration received by the assessee from contract with TDSIPL shall be taxable as per provisions of section 44BB of the Act. The A.O. is directed to grant the relief accordingly. 14. It is further necessary to observe in assessee s own case for the assessment year 2012-13 when the issue of payment of sub-contract cost again cropped up the assessee took a stand before the Transfer Pricing Officer that such payment being merely a pass through cost Should not form part of the operating cost of the assessee. The Transfer Pricing Officer after considering the submissions of the assessee and going through the relevant contracts as well as other material on record and the functions performed by the assessee and its A.E. in relation to the off-shore drilling work of ONGC, recorded a finding of fact that the receipts assessee gets from ONGC pertains to function which are actually performed by the A.Es. He also noted that the assessee had bidded for the contract with ONGC on the strength of the assets and competence of the A.E. and the contract is also performed by the A.E. using their assets and the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee to the A.E. This is a completely new issue raised by the learned Departmental Representative at the second appeal stage. Since, we are deciding the appeal filed by the assessee, we have to restrict ourselves to the grounds raised in the Said appeal. The issue raised by the learned Departmental Representative since does not arise out of the order of the Transfer Pricing Officer or DRP, cannot be considered at this stage of the proceeding. 15. In the course of hearing as well as in the written submission, it was submitted by the learned Authorised Representative if the sub-contract cost paid to the A.E. is not included in the cost base, the margin of the assessee would be higher than the margin of comparables considered by the Transfer Pricing Officer himself. Hence, the issue relating to comparables need not be gone into. As we have accepted assessee s claim in relation to non-inclusion of sub-contract cost paid to the A.E. in the cost base of the assessee, the other issues relating to comparability analysis having become academic in nature, we do not intend to adjudicate them. 16. In view of the above, grounds no.1 and 2, are allowed and grounds no.3 to 7 are dismissed as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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