TRANSOCEAN DRILLING SERVICES (INDIA) PLT,MUMBAI vs. DCIT CIR 15(3)(1), MUMBAI

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ITA 453/MUM/2016Status: DisposedITAT Mumbai11 January 2016AY 2011-1244 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the sub-contract payment made by the assessee to its AE was in the nature of a pass-through cost, as the assessee acted merely as an intermediary. Therefore, this cost should be excluded from the assessee's cost base for determining the arm's length price.

What were the facts?

The assessee, Transocean Drilling Services (I) P. Ltd., entered into international transactions with its associated enterprise (AE) for offshore drilling services. The Transfer Pricing Officer (TPO) made an upward adjustment on account of transfer pricing, considering sub-contracting costs paid to the AE as part of the assessee's operating cost.

What were the issues?

Whether sub-contracting payments made to an associated enterprise should be considered as part of the operating cost for transfer pricing adjustment. Determination of arm's length price for international transactions.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 44BB,Section 44D

AI-generated summary — verify with the full judgment below

i HE _3idit 3eIu_uo_Zto % j9t INTHEINCOME TAXAPPELLATE TRIBUNAL "K" BENCH, MUMBAI {a du Hay tei nada & Z04 Haz & HDTG BEFORE SHRI RAJENDRAACCQUNTANT MEMBER AND SHRI SAKTIJITDEY_JUDICIAL MEMBER H dd_ILITAno45B/Mum/2016 @er * Assessment Year 2011-12) Transocean Drilling Services (I) P. Ltd_ Transocean House, Lake Boulevard Rd. Hiranandani Road, Hiranandani Business Park, Powai Mumbai 400 076 PAN AACCT9587A Appellant v/s Dy_ Commissioner of Income Tax Circle-15(3)(1), Mumbai 400 020 Respondent Auffa #1 3k # Assessee by Shri Porus Kaka a/w Shri Divesh Chawla Shri N.K, Chand TTJTFd #1 31 # / Revenue by Tars TRT Date of Hearing 17.10.2016 3i&er Alyut drTw / Date of Order 13.01.2017 3d8r QRDER 2Tia & Z44 HGF & 44IL PERSAKTIJIT DEXJM Captioned appeal at the instance of the assessee is directed against the order dated 8th December 2015, passed under section 143(3) r/w section 144C(13) , in pursuance to the direction of the DRP-II, Mumbai_ for the assessment vear 2011_12 Transocean Drilling Services (I) P. Ltd. 2 Grounds raised by the assessee relates to the issue of addition of ? 47,88,71,298, on account of transfer pricing adjustment; 3 . Shorn of unnecessary details, relevant facts are Transocean Group is stated to be the world's largest off-shore drilling contractos providing the most versatile fleet of mobile off-shore drilling unit to help clients find and develop oil and natural gas reserves. The Transocean Group consisting of a number of companies such as Transocean Off-shore International Ventures Ltd. (TOIVL), SEDCO Forex International Drilling Inc: (SFID), Triton Holdings Ltd: (THL) ad 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 natural 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 bid for the 3 Transocean Drilling Services (I) P, Ltd. 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 ? 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: - Provision Of support services Reimbursement of expenses 76,37,60,397 7 29 98 773 ii) Transocean Drilling Services (I) P, Ltd. 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; ii) Liaisoning and Co-ordination; iii) Assistance in import of equipments and warehousing; iv) Accounting and document maintenance; and v) Invoicing and collection . 5 . Besides, the assessee performed other support administrative activities that would enable the Transocean entities to execute the contract efficiently. He noticed , the assessee has categorized itself as tested party having undertaken lesser risk and bench-marked the transaction by adopting TNMM as most appropriate with OP/OC as the PLI. Assessee had selected five companies as comparables with average updated margin of 5.13% as against margin shown by the assessee of 63.94% after excluding foreign exchange loss and 13.11% including foreign exchange loss. The Transfer Pricing Officer on examining the annual report for the relevant previous vear, however, found that the assessee had entered into following transactions with its A.E. Transocean Drilling Services (I) P, Ltd. Sub-contracting costs paid Recovering of expenses received Reimbursement of expenses paid ?369,40,07,189 74,80,58,593 73,69,73,756 6 The Transfer Pricing Officer noticed that, though, as per Schedule-VI of the annual report income from service was shown at ? 410,59,77,730. The assessee has reduced therefrom service tax of ? 34,82,10,146, and sub-contractor cost of ? 369,40,07,189 and has shown net revenue of ? 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, 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 Transocean Drilling Services (I) P, Ltd. 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 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 Research with average margin of 13.11%_ The Transfer Pricing Officer rejected assessee's claim that the amount paid to its A.Es towards sub-contractor amounting to ? 369,40,07,189, is 4 Transocean Drilling Services (I) P, Ltd, only a pass through cost, hence, should not be considered as part of assessee's operating cost. Accordingly , Transfer Pricing Officer considered the total contract revenue of the assessee at ? 375,77,67,584 and payment made to sub-contractor amounting to ? 369,40,07,189 as part of the operating cost of the assessee; As a result, the PLI of the assessee was worked out to 0.37%/ as against 13.11% of the comparables and the arm's length profit was determined at ? 49,26,43,330 and arm's length cost at ? 32,65,12,425 resulting in upward transfer pricing adjustment of < 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 cunn 8 Transocean Drilling Services (I) P, Ltd. 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 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 1 rigs and personnel for execution of the contract with ONGC. He submitted, these facts can be clearly established from Transocean Drilling Services (I) P, Ltd, various documents 1 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 thereafter, He submitted, agreement between assessee and its A.E: TOIVL whereby both the entities mutually agree that the assessee will submit an offer to ONGC and TOIVL has gone through and understood the requirement of the tender and are capable to provide the services for a successful execution of the contract by providing financial technical support and expertise for fulfillment of obligation as per ONGC contract, He submitted, in pursuance to the said agreement between the assessee and the A.E; to fulfill the terms and conditions of assessee's contract with ONGC , the A.E. TOIVL provided a guarantee on behalf of the assessee for performance of work. He submitted, the aforesaid documents clearly establish 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 Ho Transocean Drilling Services (I) P Ltd. submitted, the above documents are part of ONGC contract. The assessee on its part only provided co-ordination and Iiaison 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 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 AEs as under: - ct Transocean Drilling Services (I) P. Ltd. ONGC and TDSIPL Contract TDSIPLand TOMVL contract Sr No. Particulars (JT: Angel) (J 1 angel) (Sub-contact) Mobilization Clause 1.1(iii) on page 182 Clause 1.1(iii) on page 314 period of the ITAT paper book of the ITAT paper book Sub-clause (a) Sub-clause (a) Contractor shall mobilize Sub-contractor shall mobilize Drilling Unit along with crew to Drilling Unit along with crew to commence operations within commence operations at the 120 days from date of firm designated first loeation order from Operator: nominated by ONGC Sub-clause (c) Sub-clause (d) In case Contractor fails to If Sub-contractor fails to mobilize the Drilling Unit mobilizes and deploy the within the period specified in Drilling Unit along with crew the contract, the operator has and/or fails to commence operation within the period right to termninate the contract: spccified, the Operator has; at its discretion, right to terminate the contract and as a result this agreement shall automalically stand terminated. Sub-clause (02 Sub-clause (2 Ifthe Contractor is unable to In ease Sub-contractor is mobilizc/ deploy the Drilling unable to mobilize/ deploy the Unit and commence the Drilling Unit and commence operation with the period the Operation within specified specified.. it may request period. Contractor may Operator for extension of the request Operator for extension time with unconditionally of time with unconditionally agreeing for the payment of agreeing for payment of liquidaled damages. which liquidated damages. Upon shall 0.5% of the annual receipt of such a request, if the contract value. for each week Operator extends the period of of delay or part thereof subjeet mobilization and recovers from t0 maximum of 5%. the Contractor liquidated damages a sum equivalent to 0.5% of the annual contract valuc for cach week of delay or 12 Transocean Drilling Services (I) P Ltd. Sr; No: ONGC and TDSIPL Contraet (JT Angel) TDSIPL and TONL contract Particulars U Tange) (Sub-contact part there of subject to maximum of 5%, then the Contraetor shall be entitled to recover the said amount of liquidated damages from Sub- contractor. 2 Duration Clause 1.3 Sub clause (c) on page 184 of the ITAT paper book Clause 1.3, Sub clause (c) on page 315 %f the ITAT paper book Operator shall have the option Contractor (subject to ONGC to terminate the agreement at opting to terminate the any time during the last 30 days contract) shall havc the option if in the opinion of the operator to lerminate this agreement another well cannot be drillec during the last 30 days if in the opinion ofthe operalor another well eannot he drilled. 3- Liquidated damages Clause 1.4 on page 184 of Clause 1.4 on page 315 of the ITAT paper book the ITAT' paper book Sub-elause (b) Sub-clause (b) In case Contractor fails t0 If Sub-contractor fails to mobilize the Drilling Unit and mobilize the Drilling Unit and commence operation, within commence operation, within the stipulated mobilization the stipulated mobilization period _ the operator has thc period.. Contradtor (subject to right to terminate the contracl_ ONGC opt= ing to terminate the Contracl, shall. have right to terminale the contract with Sub-contractor. Sub-clause (c) Ithe Contractor is unable to Sub_elause (c) mobilize the Drilling Unit and commence the operation within Ithe Sub-contractor is unable the period specified in the to mobilize the Drilling Unit contract it may request and commence operation Operator for extension of time within specit fied period, the with unconditionally agreeing Contractor may request for the payment of liquidated Operator for extension of time damage, a sum equivalent to with unconditionally agrecing 0.5% ofthe annual contracl for payment of liquidated damages: Upon receipt Of such 13 Transocean Drilling Services (I) P. Ltd. Sr No: ONGC and TDSIPL Contraet TDSIPL and TONI contrac Particulars (JT Angeh) (J.TAangel) (Sub contact) value, for cach wcek of delay Or a request Operator extends the part thereof subject to period of mobilization and maximum of 5%. recovers from the Contractor liquidated damages a sum equivalent to 0.5% of the annual contract value, for each week of delay Or part thercof 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 0f the ITAT paper book Clause 1.6 of on page 315 0f the ITAT paper book Sub-clause 16.1; Sub-clause1.6_4: Operator shall get the Drilling Sub-contractor accepts thal Uhle Unit and equipment inspected Operator shall get the Drilling through any of the following Unit and equipment inspected internationally reputed third through any of the following parly inspection agency- the internationally reputed third cost of third party inspeetion party inspection agency- the shall bc borne by the cOst of third party inspection Operalor: shall be borne by the Operator_- Sub_clause 162: Operator will accept the Sub-clause 16.2 Drilling Unit only after Sub-contractor acknowledges Operator nominaled third party and confirms that Operator will agency confirms that Drilling accept the Drilling Unit only Unit is aS per the tender after Operator nominated third specifications parly ageney confirms that Drilling Unit is as per the tender specificalions Sub_clause163 Sub-clause 16.3: Contractor confirms completion of inspection and Sub-contractor confirms complete readiness ofthe completion of inspection and Drilling Unit in all aspects, to complete readiness of the the salisfaction ofthe Operator Drilling Unit in all aspects, (0 ineluding conformity to the satisfaction of the Operator 14 Transocean Drilling Services (I) P. Ltd. Sr. No: ONGC ad TDSIPL TDSIPL and TOIVL Particulars Contract contract (J T Angcl) (JT angeh) (Sub-contact) Operator'$ tender specification ineluding conformity to cerlified by third party Operator' $ tender specification inspeclion agency at least 30 certified by third party days prior to stipulated inspection agency at least 30 mobilization period. days prior to stipulaled mobilization period Sub-clause 1.6.4: In case the Contraetor fails to Sub-clause L.6.4: adhere to cithcr of the above In ease the Sub-contractor fails time schedules Operator t0 adhere t0 either ofthe above reserves the right to invoke the time schedules and performance bond, forfeit the consequently Operator invokes same and terminate thc the performance bond Agreement without prejudice to submitted by lhe Contractor, any other right Or remedy forfeits the same and available as per the Agreement terminaled the Contract, the Contraclor reserves the right to invoke the performance hond to the extent invoked by the Operator and terminate thc Agreement without prejudiee to any other right or remedy available as per the Agreement. 5_ Depth Clause 2.1, sub clause (6) on page 186 of the ITAT paper book Clause 2.1, sub-elause (b) on page 316 0f the ITAT paper book The Drilling unit furnished by The Drilling unit furnished by the contractor hereunder; shall the sub-contractor hercunder; bee fully equipped and adequate shall be fully equipped and to drill wells in terms of agreed adequate to driil wells in terms speeifieations and complete the of agreed specifications and same. The drilling unit and all complete the same_ The other equipment, materials and drilling unit and all other supplies provided by contractor equipment, materials and by the contractor, as spccified supplies provided by sub- or which the contractor is contraclor by the contraetor, as otherwise required to provide specified or whieh the under the terms ofthis contraclor is otherwise required agreement to provide under the terms (f this agreement.. 15 Transocean Drilling Services (I) P Ltd. SR No: ONGC 4nd TDSTPL Contract TDSIPL and TOIL contract Particulars (JTAngel) (I;angeh) (Sub-contact) Clause 2.2 Clause 2.2 Contractor confirms that the Sub-contractor confirms that drilling unit shall bc capable of the drilling unit shall be drilling unit be eapable of capable of drilling unit be drilling wells upto a maximum capable of drilling wells upto a depth of 6000 metcrs maximum depth of 6000 meters 6 Hull Structure Clause 3.5 on page 189 &f the ITAT paper book Clause 3.5 on page 318 of the ITAT paper book Contractor shall be required to Sub-contraetor shall be carry Our repair Of damages Or required to carry our repair of structura] dcfects in the hull damages Or structural defects in structure and/ Or t0 carry out the hull structure and/ or to required inspections, which carry out rcquired inspcctions, prevents the hull structure from which prevents the hull performing its normal intended structure from performing its funetions. normal intended functions. Sub-contractor shall hcar all Contractor shall bear all costs costs towards diesel, water and lowards diesel, water and other other services (Air Logisties, serviees (Air Logistics, malerial material transport and standby transport and standby hoat for boal for safety) in ease the safety) in case the inspections/ inspections/ repairs are carried repairs are carried out at out at location othcr than as location Other than as specified specificd above ahove_ Deficiencies Clause 3.6 on page 190 0f Clause 3.6 of TDSIPL and the ITAT paper book TOIVL sub-contract on Sub-clause (1) puge_ 318 0f the ITAT paper book Contractor equipment shall be maintained by le contractor in Sub-elause (2) sound and cfficient operating Sub-contractor cquipmeut shall condition at all times. Should be maintained by the sub- the performance of Contractor's contractor in sound and drilling equipment hecomes effieient operating condition at unSat tislactory Or the general all times. Should the standard of performance of performance of Suh- work hereunder be materially contractor'$ drilling eqquipment reduced hecause of defective becomes unsat tisfactory or the 16 Transocean Drilling Services (I) P Ltd. Sr No ONGC and TDSIPL TDSIPL and TOML Particulars Contracl contrac (J TAngel) (J T angel) (Sub-contac) drill pipe, drill collars, Or other general standard of Contractor' $ furnished performance of work hereunder equipment or by reason of be matcrially reduced because Contractor'$ incompetence Or of defeetive drill pipe, drill negligence, Operator shall give collars, Or other Sub- Contractor written noticc to contractor' $ furnished corrcct the specified equipmcnts or by reason of deficiencies within 15 days Sub-contractor s incompetencc failing which the Operator shall or negligence, subject to have right to terminate the Operator Contractor shall agrccment by giving 30 days give Sub-contractor written noticc. notice to correct the specified deficieneies within 15 days failing which the Contraetor shall have right to terminate this agrecment hy giving 30 days nolice. 8_ Personnel Clause 3.8 on page 191 0f Mohilization the ITAT paper book Clause 3.8 on page 319 0f the ITAT paper book In the event there is a change In the event there is a change in loeation, Contractor [subject in location. and Contractor to Operator making payment to shifts its office t0 new location, Contractor] shall pay all Operator shall pay all reasonahle expenses thereby reasonable expenses thereby incurrcd in moving a mnaximum incurred in moving a maximum of 4 of the Sub-contractor shore of 4 of the Contractors Shore base personnel, and base pcrsonnel, and Contractor'$ onshore Contractor'$ onshore equipment; Iaterial, supplies equipment, material, supplies and related ilemns located and related items located therein; from original location therein; from original location to new location sueh to new location such transaction being limited to transaction being limited to surface sea transportalion surface/ sca transportation charges only. Suh-contractor charges only; Contractor shall shall be responsible for be responsible for providing all providing all other requirement other requircment of its ofits personnel . personnel. Performance Clause 3.10 on page 191 of Clause 3.10 Of TDSIPL and the ITAT paper book TOII, sub-contract On IX Transocean Drilling Services (I) P, Ltd, Sr. No ONGC and TDSIPL TDSIPL and TOIVL Particulars Contract contract JT Angel) (T angel) (Sub-conlact) The Contractor undertakes to page 319 0f the ITAT paper perform all services under this book agreement with all reasonable skill/ diligence and care in The Sub-contractor undertakes accordance with sound industry to perforin all services under practice t0 the satisfaction of this agreement with all the Operator and accepts full reasonable skill/ diligence and responsihility for satisfactory care in accordancc with sound quality of such services_ industry practice t0 the satisfaction of the operalor and If the Operator is dissatisfied accepts full responsibility for with the work of Contractor; satisfactory quality of such then Operator shall give a services_ written notice specifying the causes of dissalisfaclion and In the event of Operator gives Contractor shall correct the written notice specifying the specified deficiencies within causes of dissatisfaction to the 15 days failing which Operator Contractor; the Contractor shall shall have the right to terminate give Sub-contractor written this agreement by giving 30 notice specifying the causes of days advance written noticc to Operator's dissatisfaction and the Contraetor unless the Sub-contractor shall correct the speeit fied deficieneies is specif fied deficiencies within 15 corrected within such 30 days failing days whieh Operator period. shall have the right to terminate this agreement by giving 30 days advance written notice to the Contractor unless the specified deficiencics is corrected within such 30 days period. Performance Clause 3.11 on page 192 of Clause 3.11 OM Kond/ page 320 0f the ITAT paper book the ITAT paper book Performancc Guarantee Clause 3.11: Clause 3.14: The Contractor has furnished to The Sub-contractor has the Contractor an irrevocable furnished to the Contractor an and unconditional Performance irrevocable and unconditional Guarantee bearing No Perlormanee Guarantec issucd 5520117516 dated 227" April by Sub-contractor'$ parent 2010 for USS 1,724,490.32 Company namely Transocean (U.S. Dollars One Million Seven Inc. wilh validity upto the Hunclred Twenty-Four expiry or termination of thc thousand Four hundred Ninely said (ontrart In the event of and 'Thirty Two cents only) with the Sub-eontractor failing to 10_ 18 Transocean Drilling Services (1) P; Ltd. ONGC and TDSIPL Contracl TDSIPE and TONL contract Sr: No: Particulars (JT Angeh) (JT angel) (Sub contact) validily of 15th December, 2013- honour any ofthe The Contractor agrees t0 extend commitments entered into the validity ofthe Performance under this Agreement and /Or Bank Guarantee So as to be in respect of any amount due valid up to 60 days beyond the from Sub-contractor t0 the last date primary term of Contractor,; the Contractor shall Agreement or cxtension have the unconditional option entered into under this under the guarantee to invoke Agreement and/or in respect of the said Performance any amount due from Guarantee with Transoccan Inc_ Contractor to the Operator, the and claim the amount from Operator shall have the Transocean Inc. and forfeit the unconditional option under the same. Transocean Inc. shall bc guarantee to invoke the said obliged to make the payment to guarantee with the bank and the Contractor upon demand. elaim the amount from the Notwithstanding the invocation bank and forfeit the same The of the Performance Guarantee bank shall be obliged to mnake hy the Contractor, ifthe the payment to the Operator on Agreement is not terminated demand The Contractor simultaneously with the further agrees to extend the invocation of Performanee period of this guarantee Or to Guarantee, Sub-contractor shall furnish a fresh guarantee ifthe not he discharged from its (pcrator decides to the extend obligations to diligently and the period of this Agreement as effieiently execute the stated in the Article 1. 3. Agreement as per the terms and conditions herein I1_ Material, supplies, equipment and services Clause 4.1 on page 192 0f the ITAT paper book Clause 4.1 on page 320 of the ITAT paper book Sub-clausc (a) Sub-elause (a) Contractor will furnish and Sub-contractor will furnish and maintain at its cost all items maintain at its cost all items designated at Exhibit A hereto designated at Annexure "1 under thc hcading 'Furnished hereto under the heading by the Contractor Furnished by the Sub- contractor 12- Personnel Clause 4.2(a) submitted On page 192 0f the ITAT paper book Clause 4.2(a) of TDSIPL and TOIVL sub-contract on page 320 of the ITAT paper book 19 Transocean Drilling Services (I) P. Ltd. Sr No ONGC and TDSIPL TDSIPL and TOMVL Particulars Contract eontract (JT Angeh) (JET. angel) (Sub-contact) Sub-clause 4.2 a) The Contractor will at the time Suh-clause 4.2 (a): at its sole expense and under its exclusive responsibility The Sub-contractor will at the supervisoresechnical, otherange time at its sole expense and personnel to properly perform under its exclusive the work; in the numbers and responsibility arrange calegories as specified in the supervisory, Iechnical, other contract (such as Drilling personnel to properly perform Superintendent, Chief the work, in the number and Mechanic , Subsea Engineer, categories aS speeified in the Asst . Subsea Engineer, Driller, contracl such as Drilling Asst. Driller, etc )- Superintendent, Chief Mechanic Subsea Enginecr , Asst. Suhsca Engineer, Driller; Asst. Driller, ctc )_ 13- Space at Nhava Clause 43 on page 193 %f the ITAT paper book Clause 4.3 on page 321 0f the ITAT paper book The operator may provide space The Contractor (subjeet to the al ils Nhava Supply Base for operator providing_ may transit storage of material provide space at its Nhava required for carrying out Supply base for transit storage driiling operations it is agreed of material required for that the contractor shall remove carrying out drilling operations. their materials at their cost, Il is agreed that the sub- within 30 days from the time of contraclor shall remove their arrival 0f material from the materials at their cost within 30 space provided by the operator days from the time of arrival of al Nhava material from the space provided by the operator al Nhava. Any material being stored by e(ntraaclor heyond 30 days; the Any matcrial being stored by operator would charge a ground sub-contractor beyond 30 days, rent as per Mumbai Port Trust the operator would charge rale applicable 0n the day of ground rent as per Mumhai removal of matcrial and will be Port Trust rate applicable on recovered from any amount duc the day of removal of materia] the contractor without giving and will be recovered IrOm any any futurc notice._ Further, the amount duc to the sub- contractor shall obtain all contractor without giving any necessary elearance from fiture notice. Further, the sub contractor shall oblain all M0 Transocean Drilling Services (I) P, Ltd. Sr: No: ONGC and TDSIPL Contract TDSIPL and TOIVL contrad Particulars (J.T: Angel) customs lOr storagc and removal of materials from stores_ (J angel) (Sub-contact) necessary clearance from customs for storage and removal of matcrials from storcs.

14.

Independent Clause 9-1 on page 199 of Clause 9.1 Contractor on page 325 0f the ITAT paper book the ITAT paper book Relationship Sub-clause_(a}: Sub_clause_(ah Contractor, direetly and Sub-contractor, directly and through its employees, shall through its employees, shall pcrform all work connecled perform all work connected with the Drilling operations with the Drilling operations herein contemplated. In the herein contemplated. In the performance of this work performance of this work the contractor is an independent Sub-contractor is an Contractor and is completely independent contractor and is res ponsible t0 control and completely responsible to execule the details ofthe work, control and execute the details Operalor heing interested in ofthe work, proper execution and results Contractor/Operator being oltaincd. The work interested in proper cxecution contemplated hercin shall meet and results obtained. The work the approval of Operator and be contemplated herein shall mcet subjeet to the general rights of the approval of directions and inspeetion: Contractor/Opcrator and be Neither Contractor s employees subject to the general rights of nOr employces of its sub- directions and inspection. contractors, shall be considered Neither Sub-contractor $ employees of Operator: employees nor employees of its sub-contractors, shall be considered employees of Contractor/(perator: Sub-clause (b): Contractor shall at all times, Sub-elause (b): have full responsibility for eontrol, direction and Sub-contractor shall at all supervision of operations being limes, have full responsibility earried out under this for control, direction and Agrcement except when and to supervision of operations being the extent that the carried out under (his Operator assumes control and Agreement except when and to supervision of operation. the extent that the Operator assumes COntrol and supervision of operation 2t Transocean Drilling Services (I) P. Ltd. ONGC and TDSIPL Contract TDSIPL and TONL contrac Sr. No: Particulars (JT: Angel) (J Tangel) (Sub-contact) 15_ Representati Clause 9.2 on page 200 of Clause 9.2 on page 326 of ves the ITAT paper book the ITAT paper book Sub-clause(a): The actual performancc and superintendence Of all work hereunder shall be by Contractor. Sub-clause (a) The actual performance and superintendence of all work hereunder shall be by Sub- contractor. 16 _ Completion Or Abandonme nt Clause 10 on page 202 0f Clause 10 on page 327 0f the ITAT paper book the ITAT paper book Contractor agrees to perform all Sub-contractor agrees to work necessary to drill, perform all work necessary to complete or ahandon each well drill, complete or abandon each in the manner specified by well in the manner specified by (perator. Contractor/Operator. 17_ Drilling unit Clause 13.2 on page 204 of Clause 13.2 on page 328 of licenses the ITAT paper book the ITAT paper book Sub-clause 13.2: Sub-clause 13.2: Contraclor agrees that it shall Sub-contractor agrecs that it secure permits and licenses for shall secure permits and operations Of the Drilling Unit licenses for operations of the in Indian Waters, if required Drilling Unil in Indian Waters, and Contractor shall pay any if required and Suh-contractor expenses in this regard shall pay any expenses in this It is the responsibility ofthe regard. Contractor t0 obtain Naval Contractor confirms that it Defence Clearance ol Drilling would assist the Sub-eontraclor Unit prior to commencement in obtaining Naval Defence this Agrecment from Ministry Clearance of Drilling Unit prior of Defence through Ministry of to commencement of contract Petroleum and Natural Gas from Ministry of Defence (India), at his cost. through Ministry of Petrolcum It is the rcsponsibility ofthe and Natural Gas India), at Contractor t0 obtain all Sub-contraetor's eost_ However, necessary permissions and for obtaining Naval Defence clearances from the statutory Clearanee, and other necessary Transocean Drilling Services (I) P. Ltd. Sr No: ONGC and TDSIPL TDSIPL and TOIVL Particulars Contract contract (T Angc) (JTangel) (Sub contact) aul horities, for operating the permissions and clearances for Drilling Unit in Indian waters, the statutory authorities, at his cost_ Contractor confirms that Contractor shall ensure that the Operator shall issue forwarding Drilling Unit is classed and letter upon request from Sub- confirm that they would obtain contractor supported by all permission/elearance of DG relevant valid documents Shipping, wherever required for Contractor confirms that it operat ing the Drilling (Jnit in would assist thc Sub-contraclor Indian waters, at his cost. in obtaining all necessary Howevcr, for obtaining Naval permissions and clcarances Delence Clearance and other from the concerned statutory necessary permissions and authoriti ics, for operat ing the elearanccs from the stalulory Drilling Unit in Indian waters, authorities, Operator shall issue at Sub-contractor'$ cost_ forwarding letter upon request Suh-contractor shall ensure from Contractor supported by that thie Drilling Unit is classed all relevant valid documents. and confirm thal they would obtain permission clearance of DG Shipping, wherever required for operal ing the Drilling Unit in Indian waters, al their cost. Insurance Clause 14 On page 204 %f Clause 14 on page 328 of the ITAT paper book the ITAT paper book Sub_clause 141: Sub clause_14.1: Contraetor shall procure al Sub-contractor shall Contractor'$ expense and procure at Sub-contractor'$ expense and maintain with respect to and maintain with respect to and for the duration of this for the duration of this Agreement the insurance Agreement the insurance policies described below and policies deseribed below and with policy limits indicated with policy limits indieated helow: below: Workmen 's compensation Workmen 's compensalion and employces' liability and employees' liability insurance insurance Comprehensive general Comprehensive general liahility insuranee liability insurance Marine insurance Marine insurance 18_ 29 Transocean Drilling Services (I) P. Ltd. ONGC and TDSIPL Contract TDSIPL and TOMVL contract Sr No: Partieulars (JT:Angel) Comprehensive general automohile liahility Prolection and indemnity liability angel) (Sub-contact) Comprehensive general automohile liability: Protection and indemnity liability 19_ Indemnity Clause 14.6 on page 206 of clause 14.6 on page 330 of Agrecments the ITAT paper book the ITAT paper book A Contraelor agrees lo As Sub-contractor agrees to protcct, defcnd, indemnily protecl, defend, indemnily and hold Operator its CO- and hold leases, its agents; if any, its Contractor/Operator its other Contractor'$ and/or Co , leases, its agents, if their cmployees harmless any, its olher contractors Irom and against all claims, (other than Sub-contractor) suits, demands and causes and/or their employces of action, liabilities, harmless from and against expenses, costs, liens; all claims, suits, demands rights in rem; and and eauses Of aeti0n, judgements of cvery kind liabilities, expenses, costs, and characler, withoul liens, rights in rem; and Iimit, which may arise in judgements of every kind favour Of Contractor, and character; without Contractor'$ employees, limit , which may arise in agents, sub-contractors Or favour 0f Sub-contractor, their employees, on Sub-contractor' $ account of bodily injury Or employees, agents, its death of Contractor' s subcontractors or their cmployecs, agent, sub- employees; on account of contractor s employee or bodily injury Or dealh of damage to said employee'$ Sub-contractor' $ property as a result ofthe employees, agent, operations, contemplated subcontractor' $ employee hereby, regardless of or damage to said whcther said claims, employee'$ property as a demands, O causes of result of the operations; action arise out of contemplated hereby, ncgligence or otherwise, in regardless o whether saidl wholc or in part, claims, demands, Or causes unsea- worthiness O other of action arise out of fault, including pre-existing negligence Or otherwise, in conditions Of Operator, its whole Or in part, un - contraetors other than the seaworthiness or other Contraelor, sub- fault, ineluding pre-existing contradtors, partners,_Joint conditions ( Contraetor/ 24 Transocean Drilling Services (I) P. Ltd. ONGC and TDSIPL Contract TDSIPL and TOIVL contract Sr No Particulars (JT Angel) Ventures, their employees or Agents. (JT angel) (Subcontact) Operalor,; its contractors other than the Sub- contractor partners, Joint Venturcs; their employees B_ Operator agrees to protecl_ Or Agents. defend, indemnify and hold B. Contractor (to the extent Contractor and its sub that Contraelor receives an contractors, its agent and equivalent indemnity from its affiliates, its other contractors and/or their Operator), agrees t0 proteet, defend, indemnify employees harmless from and hold Sub-contractor and against all claims; and its subeontraetors, its suits, demands and causes agent and its affiliates, its of aclion; liabilities, other contractors and/or expenscs, costs, licns, their employees harmless rights in rem and {rom and against all claims, judgements Of every kind suits, demands and causes and character, without of action, liabilities, limit, which may arise in expenses, costs; liens, rights favour of Operator, in rem and judgements of Operalor' $ employees, every kind and character, Agents, invitees; without limil, which may contractors (other than arise in favour of Contractor) and sub- Contraelor, Contractor' $ contractors 0r their employees, Agents, employecs, on account of invitees, contractors (other bodily injury or death o than Sub-contractor), or Contractor's cmployces, their employees, on aceount agents, invitees, contractors of bodily injury or dcath of (other than Contractor) and Contractor'$ employees; sub-contractors Or damage agents, invitees, contractors to said cmployccs or its (other than Sub-contraclor) property (ineluding any or damage to said property of Operator) as a employees or its property result of the operations (including any property of contemplated hercby, Contractor) as a result of rcgardlcss of whether or the operations not said elaims, demands, contemplaled hereby, Or causes of action arise out regardless of whether o1 of the negligence or not said claims, demands, otherwise in whole or in Or Causes of action arise out part, unseaworthiness Or ofthe negligence or other faults; ineluding pre - otherwise in whole or in existing conditions of part, unseaworthiness OT Contractor, its other faults, including pre subcontractors, partners, existing conditions of Suh- 2 Transocean Drilling Services (I) P. Ltd. ONGC and TDSIPL Contract TDSIPL and TOIL contract Sr No Particulars (J T: Angcl) (Jra angel) (Sub- contact) Joint Venturers, employees contractor, its OT agents: subcontractors, partners, Joint Venturers, employees OI agents: 20. Payment of Clause 15.5.1 Refer page Clause 15.1.1 Refer page Excise Duty, 210 0f the ITAT' paper book 333 % the ITAT paper book Vat Sales Tax, Works Contract Tax VAT/ Sales Tax/ Works VAT/ Sales Tax/ Works And Service Contract Tax/ Excise Duty Contract Tax/ Excise Duty Tax levied, ifany, on levied, if any, on matcrials/consumables will be materials/consumables will be to the account of Contractor. to the account of Sub- VAT/ Sales Tax; Works contractor: VAT/ Sales Tax/ Contract Tax/ Excise Duty Works Contract Tax/ Excise levied, ifany, On charter hire Duty levied, if any, 011 charter payments received by the Sub- hire payments received by the conractor under this contract , Sub-contractor; under this will be to the account of contract, will be to the account Operator. of Contractor. 21- Termination Clause 22.5 Refer page Clause 22.5 Refer page 337 for 217 Of the ITAT paper book 0f the ITAT paper book unsatisfacto Ifthe operator consider that the Ithe operator consider the rY performance ofthe contractor performance of the sub Performance is unsatisfactory OT, not upto contractor is unsatisfactory Or S the standard, the operator shall not upto the expected standards notify the contractor in writing and notifies the contractor and specify the details. about its dissatisfaction, the operator shall have the option contractor shall notify the sub to lerminate the agrcement by contractor in writing and giving 30 days notice in writing specify the details: Contractor to the contractor, if, the shall have the option to contractor fails to eomply with terminate the agreement by the requisition contained in the giving 30 days notice in writing said written notice issued by to the suh-contractor (provided the operalor. the operalor issues sueh notice of termination to the contractor), if, the sub- contractor fails t0 comply with thc requisition contained in the said written notice issued by the Contractor. 26 Transocean Drilling Services (I) P, Ltd, Sr _ no_ ONGC and TDSIPL Contract (J.T. Angel) TDSIPL and TOIVL contract (J.T. angel) (Sub-contract) Particulars 22. Verification of cha- Clause 40 refer page Clause 41 refer racter and page ante - 226 of the ITAT paper 344 of the ITAT cedents of contrac- paper book book tual manpower The contractor shall The sub-contractor shall submit the documents submit the documents to to the operator prior the operator prior to to start of the work on start of the work on the the (1) character and (1) character and ante- antecedents of the cedents of the per - persons(s) proposed sons(s) proposed to be to be deployed (2) deployed (2) they have they have scrutinized scrutinized the previous the previous work of work of the persons(s) the person(s) propo- proposed to be deployed sed to be deployed (3) certified photocopies (3) certified photo_ of police verification copies of police very _ certificate fication certificates 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 Iiaison 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 29 Transocean Drilling Services (I) P. Ltd. 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 workingon Rigs Salary paid by assessee to its employees none of whom are posted on the Rigs Percentage of salary paid by TDSIPL to salary paid by AEs 769,31,83,118 71,87,45,991 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 Authorised Representative submitted that these two persons were on the pay-roll of the assessee to facilitate some technical co-ordination required between ONGC and A.E. It was submitted, these employees are not involved in actual drilling operation. He submitted, there are other rig manager on the rigs who 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 28 Transocean Drilling Services (I) P, Ltd. 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'5 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 actual drilling operation through provisions of drilling rig and integrated services and such activities are in connection with 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 2q Transocean Drilling Services (I) P, Ltd. 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 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 30 Transocean Drilling Services (I) P, Ltd. 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 is a mere intermediary. It was submitted, on the face of the aforesaid facts, while carrying out functional analysis, the Transfer Pricing Officer has misdirected himself in holding that the assessee assumed significant risk. The learned Authorised Representative submitted_ as the functions and the 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-1OB(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: Li and Fung India Pvt: Ltd. 40 taxmann.com 300 (Del. ); 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. 31 Transocean Drilling Services (I) P. Ltd. 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, therefore, the Indian entity performed an important functions of contracting bidding: The learned 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 Transocean Drilling Services (I) P, Ltd. 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. The procurement of the contract and transferring the same to another entity for commercial reasons is a normal industry practice in many sectors. Same is done for a reduced contract or commission. In other words, the commission is a reward for bearing the initial incidence of a risk: 11. He submitted, 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 29/ , 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 32 33 Transocean Drilling Services (I) P, Ltd. 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 consideration: He, therefore, submitted, in case the sub-contracting amount is to be treated as pass through 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 34 Transocean Drilling Services (I) P. Ltd. 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 findings of the provisions of marketing services in the impugned assessment year by the lower authorities. Further, Department has not filed any appeal, hence, the issue cannot be set aside to the file of the Transfer Pricing Officer on the basis of fresh argument raised by the Department which do not arise out of the order of the Departmental Authorities. In this context, he relied upon the decision of the Hon'ble Jurisdictional High Court in Maersk Global Service Centre India Pvt. Ltd_ TS-260-HC-2014-BOM-TP . 85 Transocean Drilling Services (I) P. Ltd.

13.

We have patiently and carefully heard the submissions of the parties, perused the material on record and applied our mind to the decisions relied upon. The major contentious issue between the assessee and the Department is, the sub-contracting cost paid to A.Es amounting to ? 369,40,07,189, whether should form part of the operating cost of the assessee for determining the arm's length price: While it is 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 36 Transocean Drilling Services (I) P. Ltd. 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 experience and financial capability criteria as stipulated in the Bid Evaluation criteria (BEC) The bid 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 gF Transocean Drilling Services (I) P. Ltd. that both the entities mutually agreed that the assessee while submitted an offer to ONGC and TOIVL has gone through and understood the requirement of subject tender and are capable to provide the service for successful execution of the contract by providing financial and technical support and expertise for fulfillment of obligation as per ONGC contract. It is also a fact on record that TOIVL in terms of the conditions of the contract, provided a guarantee to ONGC on behalf of the assessee for performance of work. On a perusal of the terms and conditions on which the assessee entered into agreement with ONGC as well as the terms and conditions of the agreement between the assessee and its parent company, TOIVL as given in the tabular format (supra) it is very much evident that the terms and conditions on which ONGC awarded the work to the assessee were passed on to the A.Es under the same terms and conditions by the assessee. Thus, prima-facie the assessee after obtaining the work from ONGC had sub-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 Iiaison 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 38 Transocean Drilling Services (I) P Ltd. 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 personnel to execute the work. Merely because the assessee entered into contract with the ONGC, 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 39 Transocean Drilling Services (I) P, Ltd. 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 undisputedly the assessee is remunerated with a mark-up on cost for co-ordination and liaisoning service provided by functioning as intermediary between the ONGC and the A.Es. In fact, while considering the taxability of income arising out of the sub-contract payment received by the A.E: (TOIVL) from the assessee, the DRP in its order dated 3rd November 2015, for the very same assessment year 2011-12 , has categorically observed that the assessee is merely acting as an intermediary and TOIVL was engaged in actual drilling operation through the provisions of drilling rigs and integrated service to ONGC, in connection with prospecting and extraction of mineral oil , hence, its income is taxable under 40 Transocean Drilling Services (I) P. Ltd. section 44BB of the Act. The relevant observations of the DRP are extracted hereunder for the sake of convenience. 6.1 DRP has duly examined the issue: The assessee has earned revenue from two separate kinds of contracts. One contract is with ONGC for provision of drilling rig and integrated services: ONGC is a member of a production shareing 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 1 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 assessable under the provisions f section 44BB and not section 44D/Departmental Authorities 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 41 Transocean Drilling Services (I) P. Ltd. 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 acts only as an intermediary. He further observed, the assets which have led to recovery of money from the ONGC are also owned by the A.Es and the assessee simply gets the contract on the basis of assets owned by the A.Es. Thus, taking cognizance of the aforesaid facts, the Transfer Pricing Officer ultimately accepted assessee's claim that the payment made towards sub-contract cost being a pass through cost could not be considered as part of the operating cost of the assessee for determining the arm's length price. Though, of-course, the Transfer Pricing Officer proceeded to bench-mark the commission supposed to have arisen out of the service provided by the assessee to A.E. for procurement and assignment of contract at 1.56% of the total contract value: Thus, from the aforesaid facts and the orders of the DRP in case 42 Transocean Drilling Services (I) P. Ltd. of assessee's AE. (TOIVL) for assessment year 2011-12 and Transfer Pricing Officer's order 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 ? 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 ? 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 issue of provision of services relating to bidding and 43 Transocean Drilling Services (I) P, Ltd. assignment of contract by assessee 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 infructuous. 44 Transocean Drilling Services (I) P Ltd. 17 In the result, assessee's appeal is partly allowed. Order pronounced in the open Court on 13.01.2017 Sd] - {a, du1 HaF4 RAJENDRA Sd] - 8raaofa &, TG 44FY SAKTIJIT DEY JUDICIAL MEMBER ACCOUNTANT MEMBER jof MUMBAL, fviv5 DATED: 13.01.2017 Hct?t Yaff_jfva Copy of_the_order forwarded to: (1) faufa The Assessee; (2) TTTa The Revenue; (3) 31T4F Hr3aa(Hal) / The CIT(A); HTW37 () 33F7 / The CIT, Mumbai City concerned; @ai4 YIn@, Hra Jrzt JietRU; 1as The DR, ITAT, (6) Jisf ti5c7 Mumbai; Guard file. Trrifaa 4a /Hcr1HR , By Order AGt9 & aru Pradeep J. Chowdhurv dfwo fd Hfd | Sr Private Secretary 3q HET4G 4afat (Dy./Asstt: Registrar) HT4A 3dall Hf8arU, Ffae ITAT, Mumbai

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