2013 (11) TMI 1334 - AT - Income Tax

International transaction u/s 92 of the Income tax act - Assessee rendered services of looking after the customs clearance and handling insurance and installation of equipment imported from Tellabs Denmark - Part of the on-shore contract in so far as it relates to customs clearance and installation thereafter is claimed to have been assigned by Tellabs Denmark to the Assessee. The claim of the Assessee is that effect of such assignment is that the portion of the said contract is between the Assessee and PGCIL both of whom are residents and therefore one of the requirement of Sec. 92B(1) is not satisfied Held that - Requirement for application of Sec. 92-B (1) of the Act is that the international transaction should be between two associated persons Further, the requirement of either or both the parties to the transaction being non-resident - 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 - Provisions of Sec. 92 were applicable to the assignment of the portion of the onshore contract by Tellabs Denmark to the Assessee

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for services rendered under onshore contracts.
2. Classification of the transaction as an "international transaction" under Section 92B of the Income-tax Act, 1961.
3. Adequate opportunity for the assessee to present its case before the Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for services rendered under onshore contracts:

The core issue was whether the addition made to the total income of the assessee, consequent to the determination of ALP for services rendered to Power Grid Corporation of India Ltd. (PGCIL) under two onshore contracts, was sustainable. The TPO determined the ALP by comparing the assessee's services to those provided to Tellabs US, using the Transactional Net Margin Method (TNMM). The TPO selected comparable companies and calculated the ALP, leading to an adjustment of Rs. 3,65,18,386. The Tribunal found that the TPO and CIT(A) did not properly consider the unique nature of the assignment agreement and remanded the issue back to the AO for fresh determination, allowing the assessee to submit a new TP analysis.

2. Classification of the transaction as an "international transaction" under Section 92B of the Income-tax Act, 1961:

The Tribunal examined whether the transaction of rendering services for customs clearance, handling insurance, and installation of equipment imported from Tellabs Denmark constituted an "international transaction." The assessee argued that the transaction was not international since both parties (assessee and PGCIL) were residents. However, the Tribunal observed that the assignment of the onshore contract by Tellabs Denmark to the assessee involved associated enterprises, with Tellabs Denmark being a non-resident. The Tribunal concluded that the assignment agreement between Tellabs Denmark and the assessee had all the ingredients of an international transaction under Section 92 of the Act, thus requiring the ALP test.

3. Adequate opportunity for the assessee to present its case before the Transfer Pricing Officer (TPO):

The assessee contended that it was not given a proper opportunity to present its case before the TPO. The Tribunal noted that the proceedings commenced on 1st June 2006, and the first and final hearing was on 17th November 2006, with the order passed on 20th December 2006. The Tribunal found that the assessee was not afforded sufficient opportunity to substantiate its case or rebut the TPO's proposals. The Tribunal highlighted that the CIT(A) did not address this procedural lapse and proceeded to confirm the TPO's order. Consequently, the Tribunal set aside the CIT(A)'s order and remanded the issue back to the AO for fresh determination, ensuring the assessee would have an opportunity to present its case.

Conclusion:

The Tribunal concluded that the assignment of the onshore contract by Tellabs Denmark to the assessee constituted an international transaction under Section 92 of the Act. However, due to procedural lapses and inadequate consideration of the unique nature of the assignment agreement, the Tribunal remanded the issue back to the AO for fresh determination of the ALP, allowing the assessee to submit a new TP analysis and ensuring a fair hearing. The appeals were treated as allowed for statistical purposes.