Transfer Pricing: Assignment of contract by AE is an international transaction and should be at arms length price

The assessee’s AE, Tellabs Denmark, was awarded a contract by Power Grid Corporation for the supply, installation and commissioning of 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. Pursuant to a corporate restructuring, Tellabs Denmark assigned a portion of the On-shore contract relating to freight, insurance and installation to the assessee. Power Grid consented to the assignment on the condition that Tellabs Denmark will continue to be liable for due performance of all contracts. The AO & TPO held that as Tellabs Denmark continued to be liable to Power Grid for the onshore contract, the assignment of the said contract by Tellabs Denmark to the assessee constituted a sub-contract (and not an independent contract) and that for the work of customs clearance and installation of equipment performed thereby the assessee ought to have earned an arms length profit margin of PBIT/Sales of 9.49%. On appeal by the assessee to the Tribunal HELD:

The assessee’s claim that the effect of the assignment of the work of customs clearance and installation by Tellabs Denmark to the assessee is that an independent contract came into existence between the assessee and Power Grid and that as both parties were residents, the transfer pricing provisions cannot apply is not acceptable because it is clear from the various agreements that there has been only an assignment of the portion of an onshore contract by Tellabs Denmark to the assessee and not a novation of the portion of the onshore contract between Tellabs Denmark and PGCIL. The consequences in the event of an assignment and novation are different. Since there has only been an assignment and not novation of the contract in the present case, the transaction of assignment between the assessee and Tellabs Denmark cannot be said to be a transaction between two persons either or both of them were not non-residents. It is a very strange situation because if Tellabs Denmark had not assigned the portion of the onshore contract, the transfer pricing provisions would not have been applicable because Tellabs Denmark and PGCIL are not Associated Enterprises. Though the assignment of the portion of the onshore contract has taken place exactly at the same consideration for which Tellabs Denmark agreed to render services to PGCIL, nevertheless, the assignment agreement between Tellabs Denmark and the assessee has all the ingredients of an international transaction within the meaning of s.92 of the Act. However, the ALP will have to be determined afresh because the international transaction is the assignment between Tellabs Denmark and the assessee and not the agreement between the assessee and PGCIL. The TPO should also consider whether as the assignment of the contract had taken place due to business restructuring and on the same terms as agreed between Tellabs Denmark and PGCIL, it could be said that this transaction itself would constitute a comparable uncontrolled transaction (Swarnandhra IJMII Integrated Township (ITAT Hyd) distinguished).