Bangalore Tribunal ruling on applicability of transfer pricing provisions to assignment of contract

 

The Bangalore Income-tax Appellate Tribunal (Tribunal) in the case of Tellabs India Private Ltd (Taxpayer) has ruled on the issue of whether assignment of a contract to the Taxpayer by an Associated Enterprise (AE) is an international transaction to which the transfer pricing provisions apply.

The Taxpayer is a member of a US based group engaged in designing, manufacturing and selling telecom equipment and products. Tellabs Denmark, the Taxpayer’s Danish AE, entered into a turnkey contract with an Indian customer for supply and installation of telecom equipment. The onshore component of the contract was thereafter assigned by the AE to the Taxpayer.

The Tax Authority treated the assignment as an international transaction and sought to determine whether the consideration received was arm’s length. The Tribunal upheld the order of the Tax Authority and held that the assignment of contract constituted an international transaction that needed to be evaluated for satisfaction of arm’s length principles. The Tribunal thereafter remanded the matter back to the Tax Authority for determining the arm’s length price.

The Indian tax law provides a fairly broad definition for the term “international transaction” subject to transfer pricing provisions. The ruling affirms that the broad definition covers even arrangements between AEs involving assignment of contracts or other similar rights. The ruling however does not address the more contentious issue of determination of arm’s length consideration for such international transactions. The Taxpayer argued that as the assignment was under similar terms and conditions as that were agreed with the uncontrolled customers, the same should be recognized as a comparable uncontrolled price (CUP). The Tribunal has however left the issue open for consideration by the Tax Authority.