The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) upheld the determination of Arm’s Length Price (ALP) on reimbursement of third-party costs incurred under Comparable Uncontrolled Price (CUP) and directed the deletion of the proposed adjustment.
M/s. Transocean Drilling Services (I) Pvt. Ltd, the assessee company filed the returns electronically on 30/11/2012 declaring a total income of Rs.2,42,79,910/-. The assessee company is engaged in the business of coordination / liaisoning services to the group companies. During the year under consideration, the assessee company has shown revenue from operations at Rs.6,54,08,130/- and other related income at Rs.29,78,840/-.
The AO found that the assessee company had entered into Contractor Agreement with Oil and Natural Gas Corporation Ltd. (ONGC) for the hire of drilling rigs and had given a sub-contract of the same activity to its group company. A reference under section 92CA(1) of the Act was made by the AO to the file of the TPO for determining the ALP of international transactions carried out by the assessee.
The assessee is an Indian company liable to income tax in India as per the provisions of the Act. The AE of the assessee is engaged in offshore drilling activities by deploying rigs and skilled personnel. The AEs operate as project offices in India and pay taxes in India under section 44BB of the Act @40% plus surcharge and cess on the income determined @10% of total receipts on a gross basis. On the contrary, the assessee is engaged in providing coordination / liaisoning services to AEs and remunerated the cost plus markup basis on its own cost.
The assessee is merely a pass-through entity collecting the US$ from ONGC and passing on the same to AE under a back-to-back arrangement. Since this exchange loss is purely notional, the assessee has chosen not to get it reimbursed from its AE during the year under consideration.
It was observed that the assessee was duly justified in not adding a markup of 10% on this exchange loss since it is purely notional in nature in the peculiar facts and circumstances.
TPO had observed that the assessee had reimbursed expenses to AE towards travel, accommodation, conveyance, communication charges, cargo costs, stock-based compensation, employee expenses, freight charges etc. without any markup.
A Coram comprising Shri M Balaganesh, AM & Shri Pavan Kumar Gadale, JM observed that when the transaction is in the reimbursement of expenses to AE, the third party cost incurred is a CUP for reimbursement. Accordingly, the CUP method chosen by the assessee considering the nature of the transaction and degree of comparability as the Most Appropriate Method is hereby upheld.
Further viewed that all these expenses have been duly included in the total expenses included by the assessee on which markup of 10% has been claimed by the assessee from its AE. Hence, the action of the TPO in determining the ALP of this transaction at ‘Nil’ is absolute without any basis and directed to delete the adjustment proposed in the sum of Rs.19,94,336/-.
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