AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 1334
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....labs 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 'Associated Enterprise' (AE) of the assessee within the....
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....he 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) &nbs....
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....ion 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 the provisions of Sec. 92-E of the Act read with Rule 10-E of the Income Tax Rules, 1962 (the Rules) every person entering into an international transaction with an AE during the previous year has to report in Fo....
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....spite 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 was performing to Tellabs US. In this regard it may be recalled that 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....
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....ternational 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 deeming provisions of Sec 92B(2) of the Act. * The conditions prescribed under S.92B(2) for a transaction to be deemed an international transaction between two associated enterprises have been met. There was a prior agreement between the person (PGCIL) and the associated enterprise (Tellabs Denmark). The assignment agreement and....
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....levant 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 installation of those equipment remains with the assessee. 2. The activities of assessee's HO and Indian Co. cannot be compartmentalized into onshore & offshore activities for supply of equipment, Though the onshore installation erection and commissioning and local transportation was assigned by the assessee to Indian co. and Indian co. directly r....
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....sp; (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) Either or both the parties to the transaction should be Non-Residents. The transaction may relate to one or more of the following :- (a) Purchase, sale or lease of Tangible or Intangible Property. (b) Provision of services. (c) Lending or borrowing of money. (d) Any transaction ha....
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.... (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 enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governin....
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....prise. 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 through an intermediary, then Enterprise B is said to be an AE of enterprise A. Further, if Mr. A and Mr. B control both Enterprise A and Enterprise B, then both Enterprise A and Enterprise B are AEs. 25. We will now revert to the facts of the present case and see if the conditions mentioned in Sec. 92B(1) or (2) of the Act are satisfied. As far as condition (2) for application of Sec. 92B(1) of the Act referred to above is concerned, the requirement o....
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.... [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 benefits of, and was entitled to exercise all of the rights and remedies to Tellabs Denmark with regard to the Onshore contract. (vii) Any and all rights of Tellabs Denmark to compensation (whether due before or after the effective date) under the onshore contract devolved upon and enjoyed by the assessee, including the right to invoice directly PGCIL and receive payments directly from PGCIL for the assigned rights and obligations. &nb....
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....abs 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 'burden', or obligations, under a contract cannot be transferred. If one wants to transfer the burden of a contract as well as the benefits under it, one has to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well. In a novation, the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the origin....
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....tipulated 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 regarded as tainted with the object of avoiding taxes. Nor does it have any reference to the current transaction nor was the current transaction contemplated at that time. Therefore it cannot be regarded as being in relation to the present transaction and does not have any reference to it. Therefore, there is no prior agreement as required under the first limb of section 92B(2). 36. As a result, the preconditions to attract section 92B(2) of the Act have not been satisfied in the instant case. It ....
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....he 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 was provided. (iv) Vide letter dated 31.08.2006 : Copy of the contracts entered with PGCIL was submitted. (v) Vide letter dated 20.11.20.06 : objection against the proposed order u/s 92CA and the basis on which the objections were raised was submitted. In this letter the assessee also gave a working of the net margin of the comparable companies. 41. The assessee had, in the letter, broadly stated the following: (i) the transaction u....
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....erprises 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 enterprises are not arranged so that the taxes legitimately attributable to income accruing in India are not adversely affected. This basic principle should not be lost sight of. The Transactional profit methods (i.e. Transactional Net Margin Method and Profit Split Method) are treated as methods of last resort which are pressed into service only when the standard methods, which are also termed as 'traditional methods', (i.e. Comparable Uncontrolled Price Method, Resale Price Method and Cost Plus Method) cannot be reasonably applied.....