Case Laws :: Transfer Pricing :: Consequences of an assignment and novation of contract are different

CLR Editorial Notes: In this case, the assessee™s (Tellabs India) associate enterprise, Tellabs Denmark, was awarded a contract by the Power Grid Corporation for the supply, installation and commissioning of telecommunication equipments. The work was to be performed both within India (customs clearance in India and installation termed as “onshore”) as well as outside India (where manufacture and supply of telecom equipments would be from Denmark termed as “offshore”).

The Offshore and Onshore contracts were independent contracts.

Pursuant to a corporate restructuring, Tellabs Denmark assigned a portion of the onshore contract relating to freight, insurance and installation to Tellabs India (the assessee). Power Grid consented to this assignment of contract with the condition that Tellabs Denmark will continue to be liable for due performance of all contracts.

The Assessing officer in this transaction and the Transfer Pricing Officer, 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 its AE in India, constituted a sub-contract (and not an actual 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%.

This was appealed to the Tribunal by the assessee (Tellabs India). 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).”


Main Case FileTellabs India Private Ltd vs. ACIT (ITAT Bangalore)

Reference Case FileSwaranandhra Ijmii Intergrated vs Assessee on 31 December, 2012

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