Tellabs India (P)
Ltd. vs ACIT
IT (TP)A Nos. 1037
& 1038/Bang/2008
A/Y 2003-04 &
2004-05
Bangalore Tribunal
Facts:-
1.
The Assessee was incorporated in India on
30.12.1998 as a wholly owned subsidiary of Tellabs 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.
2.
Tellab Denmark, AE of assessee, entered into
contract with Power Grid Corporation of India Ltd (PGCIL) 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).
3.
After the award of contract to Tellabs Denmark,
a corporate restructuring exercise took place in 2002, wherein the entire
business activities of the assessee’s group were restructured. . Tellabs
Denmark therefore sought permission of PGCIL to assign a portion of the Onshore
contract to the Assessee. PGCIL agreed to the proposal subject to the condition
that Tellabs Denmark will continue to be liable for due performance of all the
4 contracts.
4.
Tellabs Denmark assigned on shore contract on
the same terms and conditions to which it has agreed with PGCIL in original
contract. Thus in place of Tellabs Denmark , assessee has become party to on-shore contract with PGCIL.
5.
In its TP report, submit with respect to other
transactions of marketing, sales and
customer support services to Tellabs International Inc, USA, assessee does not
report anything about performance of contract under assignment.
6.
AO/TPO held that transaction between Assessee
and PGCIL is international transaction u/s 92B(2), ignoring the fact that
assessee and PGCIL both are residents. Section 92B(2) provides as under:-
“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”
7.
AO/TPO applied TNMM and PBT/Cost as PLI, as adapted
by assessee for its other international transaction, to deemed international
transaction and arrive at ALP on the basis of expenses incurred by assessee in
performance of on shore contract. In other words AO/TPO assumed that assessee
is providing custom clearance and installation service under on shore contract
on behalf of Tellabs Denmark and it needs to be compensated accordingly.
However post assignment, assessee was executing the contract in its own
capacity and not as an agent of Tellabs Denmark.
Held:
1. The transaction between assessee and PGCIL
is not deemed international transaction u/s 92B(2) on following ground:-
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.
2.
Assignment
of on shore contract by Tellabs Denmark to assessee is international
transaction and directed the AO determine the ALP of said international
transaction.
Critical
Comments:-
1. Deemed International transaction.
Section 92B(1)
provide that for transaction to be international transaction either or both of
the parties should be non-resident.
Section
92B(2) provides that transaction between enterprise and any third person will
be deem as international transaction, if the terms of such transaction is
regulated by Associated enterprise. This sub-section is silent about the
residential status of parties to the transaction.
In the
instant case Assessee and PGCIL are both residents and even then TPO deemed the
transaction between them as international transaction
Tribunal,
on the basis that PGCIL is government entity and it has no ulterior motive to
evade tax, has held that terms of agreement between Assessee and PGCIL is not
regulated by Tellabs Denmark and hence it is not deemed international
transaction.
Tribunal does not decided the crucial question,
if both the parties to the transaction are resident, can it be deemed
international transaction u/s 92B(2)
2. Arm’s Length price on assignment of
contract
a)
The nature of international transaction appears
to fall with the criterion of transfer on Intangibles. OECD has come up with Discussion Draft on Transfer
Pricing aspect of Intangible , wherein rights under contract is
treated as intangible and transfer thereof between associated price requires
determination of ALP.
b)
Since the transfer of such type of contract is
rare in practice, it will be difficult to find the comparable for such type of
international transaction. The comparable will be determined assuming what independent
enterprise would arrive at on assignment of such contract. On this basis, the
assignor will receive compensation for assigning the contract and assignee will
make payment.
c)
If assignee is required under comparable
conditions to make payment for getting assignment of contract, it will
constitute expenditure on the part of assignee, assessee in this case. Such expenditure
will reduce the taxable income of assessee.
If
above comparability is adopted, there will not be any need to determine ALP on
assignment of such contract in view of provisions of section 92(3), which
provides that section 92 does not apply in the case, where determination of ALP
has the effect of reduction of taxable income of assessee
No comments:
Post a Comment