TaxTMI 
TaxTMI 
2013 (11) TMI 1334
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....labs International Inc., USA (Tellabs US). Tellabs group designs, manufactures and markets extensive line of telecom equipments and products. The Assessee was initially set up as sales and marketing office of Tellabs US and its group companies which are engaged in the business of manufacture and sale of telecommunication equipment. The Assessee also renders services in connection with installation and commissioning of telecommunication equipment, on behalf of Tellabs group of companies worldwide for their customers in India. 4. Power Grid Corporation of India Limited ("PGCIL") is a Government of India enterprise. It had invited tenders for the supply, installation and commissioning of the telecommunication equipments. The work was to be performed both outside India (manufacture and supply of telecom equipments from Denmark- offshore) and in India (customs clearance in India and installation of the equipments - onshore). The Off-shore and Onshore contracts were independent contracts. On 4th June 2001 Tellabs Denmark provided a response to the request for Tender issued by PGCIL and the tender was awarded to it. Tellabs Denmark is a subsidiary of Tellabs US and therefore an 'Associ....
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....was to make the assessee accountable for the entire risks and rewards under the assigned contract. The consideration payable by PGCIL to Tellabs Denmark in respect of Onshore contract for Delhi-Mumbai link and On-shore contract for rest of India was as follows: Delhi-Mumbai link contract: The Contract Price shall be the aggregate of US$ 321,700 + Rs. 74,489,893.00 (US Dollars Three Hundred Twenty One Thousand and Seven Hundred plus Seventy Four million Four Hundred Eighty Nine Thousand Eight Hundred Ninety Three Only). The break-up of the Contract price was as under: (i) Inland Freight & Insurance Charges : Rs.43,298,037.00 (ii) Expenditure towards expatriate personnel : US $ 282,441.00 (iii) Installation Services : Rs.31,191,856.00 (iii) Training Charges : US $ 39,259.00 TOTAL (i + ii)....
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....ntract Tellabs India Original Contract Tellabs Denmark Scope of Work Assignment of Onshore contract for Freight & Insurance and Installation Services to Tellabs India Onshore contract for * Freight and Insurance * Installation Services Compensation Freight and Insurance Charges - Rs.82,189,375 Installation Charges Rs.48,182,855 Freight and Insurance Charges - Rs.82,189,375 Installation Charges Rs.48,182,855 Other terms Terms and conditions in both the contracts are the same Assigned Contract Tellabs India Terms and conditions in both the contracts are the same Original Contract Tellabs Denmark Scope of Work Assignment of Onshore contract for Freight & Insurance and Installation Services to Tellabs India Onshore contract for * Freight and Insurance * Installation Services Compensation Freight and Insurance Charges - Rs.43,298,037 Installation Charges Rs.31,191,856 Freight and Insurance Charges - Rs. 43,298,037 Installation Charges Rs. 31,191,856 Other terms Terms and conditions in both the contracts are the same Terms and conditions in both the contracts are the same 7. As per th....
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....wherein PGCIL has clearly spelt out that the assignment of the on-shore contract shall not amount to novation of the contract in favour of Assignee. (d) Tellabs Denmark continues to be liable despite assignment. The TPO has again made a reference to the letter dated 13.1.2003 of PGCIL wherein this aspect was made clear by PGCIL. (e) The contract between PGCIL and the Assessee is not an independent contract. (f) The fact that the Assessee directly bills PGCIL for services is not relevant. (g) On services rendered for import of equipment, the Assessee took a stand that it gets reimbursement of costs incurred by it from Tellabs Denmark and therefore TP regulations will not be attracted. The TPO on the above stand held that cross charging of expenses to an AE (Tellabs Denmark) is an international transaction and had to be reported as per Form 3CEB (clause-13). 10. The TPO thereafter proceeded to determine the ALP of the transaction between the Assessee and PGCIL. He firstly held that the functions and risk in the said transaction was similar to the one which the Assessee w....
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.... Adjustment u/s 92CA 3,65,18,386" 11. Before CIT(A) the Assessee raised contentions as were put forth before the TPO besides also raising issues with regard to lack of opportunity before the TPO before passing his order and the merits of the addition made by the TPO. 12. On the issue whether the transaction in question would be international transaction so as to attract the provisions of Sec. 92 of the Act, the CIT(A) held as follows: * The original contracts entered into between M/s Tellabs Denmark (assignor) and PGCIL remain in full force and effect and shall be deemed to be amended only to the limited extent set forth in the Assignment Agreements. * The terms and conditions of the original contracts were determined in substance by its AE, M/s Tellabs Denmark and were only subsequently subcontracted/assigned to the assessee. * The assessee merely carried out the contract with PGCIL in accordance with the terms and conditions originally determined in sum and substance by its AE, Tellabs Denmark. As a result the transaction between the assessee and PGCIL is squarely covered by the ....
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.... assessed on the profits arising on offshore contract as well as the portion of the onshore contract that had not been assigned to the Assessee by the ADIT, Circle 2(2), Intl. Taxation, New Delhi. In the aforesaid order the profits arising on offshore contracts have been brought to tax on the premise that the Assessee constitutes PE of Tellabs Denmark in India. The relevant observations of the AO were as follows:- "1. The contention of the assessee that offshore supplies of equipment took place outside India, hence, the income from such supplies is not taxable is not tenable. As, a composite contract was awarded to the assessee, where the scope of activities is to supply, transportation and installation, commissioning and testing of equipment at the site of PGCIL. Therefore, the responsibility of assessee does not ceases outside India in respect of those equipments. Successful installation of equipment at the site of PGCIL was prime objective of the assessee. Although the title of equipment stated to have been transferred outside India but responsibility and risk associated in such supply does not ceases outside India and responsibility of successful ins....
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....ofits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 20. It can be seen that for application of Sec. 92B(1) of the Act there are two conditions to be fulfilled before a transaction can be said to be an "International Transaction" viz., :- (1) Transaction should be between two or more Associated Enterprises; (2....
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....management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enter....
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.... the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed." 24. As can be seen from the above definition the basic criterion to determine an AE is the participation in management, control or capital (ownership) of one enterprise by another enterprise. The participation may be direct or indirect or through one or more intermediaries. The concept of control adopted in the legislation extends not only to control through holding shares or voting power or the power to appoint the management of an enterprise, but also through debt, blood relationships, and control over various components of the business activity performed by the taxpayer such as control over raw materials, sales and intangibles. It appears that one may go to any layer of management, control or ownership in order to find out association:- (a) Direct Control (b) Through Intermediary For instance, if enterprise B is managed, controlled or owned either directly or t....
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....it was stated as follows:- (i) PGCIL has granted permission to assign the contracts in favour of the assessee. (ii) the signing of the assignment agreement shall be at the same terms as the signing of the two contract agreements by ASSIGNOR and POWERGRID in pursuance of the Notifications of Award issued on March 2002. (iii) pursuant to clause no.3 of the General conditions of contract, [an integral part of the main contract], the obligations and rights under Onshore Contract were assigned to the assessee. (iv) Tellabs Denmark [assignor] assigned, transferred and conveyed all rights, benefits and interests over the Onshore Contract to the assessee [assignee] and the assessee assumed full responsibility for the said contract. (v) The assigned contract would apply between POWERGRID and the assessee [ASSIGNEE] as if the assessee had been a party to the contracts in place of the Tellabs Denmark from the date of signature of the onshore contract. (vi) The assessee was entitled, in the place of Tellabs Denmark to all benefi....
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....ransaction between the Assessee and PGCIL are determined in sum and substance by its AE. Hence, the transactions are squarely covered by Sec. 92B(2) of the Act and is a deemed "International Transaction". In AY 2003-04, the TPO has expressed the view that there is no novation and that Tellabs Denmark continues to be responsible for due performance of all its obligations under the On-shore contracts. 31. We have perused the terms of the assignment of portion of onshore contract by Tellabs Denmark to the Assessee and the terms subject to which such assignment was accepted by PGCIL. PGCIL has consented to the assignment of the portion of Onshore Agreement by Tellabs Denmark to the assessee with a specific condition that the Assignment will not amount to Novation of contract between PGCIL and Tellabs Denmark. Section 62 in The Indian Contract Act, 1872 lays down the effect of novation, rescission, and alteration of contract. It lays down that if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. Assignment involves the transfer of an interest or benefit from one person to another. However the '....
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....etween Assessee and Tellabs Denmark, which in our view is not correct. In this regard, we agree with the submission of the learned counsel for the Assessee that PGCIL is a Government of India entity, performing a governmental functions in a restricted sector. Its policies are directly controlled by the Central Government. It can neither be accused of entering into tainted agreements or exercising undue influence for the purpose of avoiding taxes. PGCIL is neither part of a prior agreement as stipulated in the first limb of section 92B(2) nor has in substance determined the terms of the transaction with the appellant as stipulated in the second limb of section 92B(2). It has followed all the prescribed norms for calling international bids for awarding contracts, and thus cannot be accused of acting as an intermediary between Tellabs Denmark and the appellant for such purpose. 35. Even if the contract between Tellabs Denmark and PGCIL, prior to assignment, is treated as a separate agreement, it only deals with execution of work by Tellabs Denmark in relation to both the onshore and offshore part of the work. The transaction being with a Government of India entity, it cannot be reg....
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....now deal with the merits of the addition made by the TPO which was confirmed by the DRP. The first aspect which was highlighted by the learned counsel for the Assessee was that there was no opportunity of being heard by the TPO before proposing the adjustment. 40. The proceedings before the Additional Director (Transfer Pricing)-II, Bangalore commenced with a letter dated 1st June, 2006. The first and final date of hearing was 17-11-2006. Various details relevant to the said proceedings were filed by the assessee as under:- (i) Vide letter dated 15.06.2006 : Audited accounts , Copy of Form 3AB with the Transfer Pricing report and the agreements entered with associate enterprises was submitted. (ii) Vide letter dated 09.08.2006: Brief background of the company with details of the revenue streams were provided along with the cost break up and the FAR analysis on the Project Income was submitted. (iii) Vide letter dated 17.08.2006 : Income and expenses split based on the nature of revenue, objection to why the PGCIL Contract will be outside the purview of transfer pricing with the comparable details....
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....ver did not deal with this objection specifically but went on to uphold the order of the TPO. We find that the Assessee has been pursuing its ground that the transaction in question cannot be regard as one falling within the ambit of Sec. 92 of the Act and has not been addressed on the merits of the adjustment to the ALP. The Assessee had reported two transactions in Form 3CEB viz., Transaction of rendering Marketing, sales and customer services support to Tellabs International Inc. USA and transaction of loan with Tellabs Enterprises B.V. In respect of the first transaction the Assessee adopted TNMM. In respect of the second transaction the Assessee adopted CUP method. Those transactions were accepted as at Arm's Length by the TPO. The TPO thereafter proceed to hold that the Transaction which was assigned by Tellabs Denmark to the Assessee was of the same nature as that of rendering marketing, sales and customer services support of Tellabs International Inc. USA and thereafter took the very same comparables. 45. As we have already seen, the ALP adjustments are counter measures to ensure that the prices at which international transactions are entered into by the associated enter....