2018 (6) TMI 467 - AT - Income Tax

Tribunal decision: Appeal partly allowed, emphasizing genuine transactions & transfer pricing.

The Tribunal partly allowed the appeal, upholding some disallowances and directing further verification or deletion of others. The judgment emphasized the ... Genuineness of an international transaction - application of transfer pricing provisions only to genuine international transactions - arm's length price - non-application of transfer pricing provisions where ALP determination reduces income (section 92(3)) - disallowance under section 40(a)(i) for non-deduction of tax at source - depreciation entitlement within a block of assetsGenuineness of an international transaction - Hire purchase transaction in relation to the Rig held to be not genuine - HELD THAT: - The Tribunal accepted the Assessing Officer's conclusion and the assessee s concession that the hire purchase arrangement for the Rig was not genuine. Having not pressed the challenge to the AO's finding, the Tribunal treated the hire purchase transaction as bogus and applied the legal consequences that follow from a non-genuine international transaction, including denial of benefits that would flow from a genuine transaction. [Paras 5]The hire purchase transaction was held to be not genuine.Depreciation entitlement within a block of assets - genuineness of an international transaction - Disallowance of depreciation claimed on the Rig and effect on other assets in the same block - HELD THAT: - On accepting that the hire purchase of the Rig was not genuine, depreciation attributable to the Rig cannot be allowed. However, the Schedule of Fixed Assets showed other genuine additions in the same block 'Plant and machinery' (Block A). The AO had disallowed the entire depreciation of the block on account of deletion of the Rig, thereby denying depreciation relating to other undisputed assets. The Tribunal approved disallowance of depreciation in principle insofar as it related to the Rig but set aside the order to the extent it denied depreciation on other assets in the block and remitted the matter for allowance of depreciation on those other assets. [Paras 6, 7]Depreciation on the Rig disallowed; assessment restored to AO to allow depreciation on other assets in the same block (except the Rig).Application of transfer pricing provisions only to genuine international transactions - arm's length price - Principle that transfer pricing provisions apply only to genuine international transactions; consequence for ALP determination - HELD THAT: - The Tribunal explained that ALP under Chapter X is to be determined only in respect of genuine international transactions; if a transaction is not genuine, transfer pricing provisions do not apply and consequential benefits or detriments that would have flowed from a real transaction are reversed. This legal principle guided disposal of the transfer pricing adjustments made in the assessment. [Paras 8, 9]Transfer pricing provisions not to be applied to transactions found to be not genuine.Arm's length price - Nil ALP determination for 'Purchase of components and accessories' upheld (addition not pressed by assessee) - HELD THAT: - The assessee did not press challenge to the TPO/AO addition in respect of the purchase of components and accessories. Consequently, the Tribunal sustained the addition as reflected in the transfer pricing adjustment table. [Paras 10]Addition on account of purchase of components and accessories upheld.Disallowance under section 40(a)(i) for non-deduction of tax at source - arm's length price - Double disallowance of interest payment deleted so only a single addition is sustained - HELD THAT: - The TPO set ALP at Nil for interest under the hire purchase and the AO also disallowed the same interest separately under section 40(a)(i), resulting in double addition. The Tribunal ordered deletion of the duplicate addition so that only one addition of the interest amount survives. [Paras 11]Delete duplicate disallowance; sustain a single addition of the interest amount.Arm's length price - Payment of principal installments under the hire purchase remitted for verification whether any deduction was claimed - HELD THAT: - The assessee asserted that the principal installments were not claimed as a deduction and thus did not impact profit or loss. The authorities below made a transfer pricing addition by treating ALP as Nil without examining whether the payment had been claimed as an expense or resulted in creation of an asset for depreciation. The Tribunal remitted the matter to AO/TPO to verify whether the assessee had claimed deduction; if claimed, disallowance should follow, otherwise the addition should be deleted. [Paras 12, 13, 14]Matter remitted to AO/TPO to verify if deduction was claimed; disallow if claimed, delete addition if not.Non-application of transfer pricing provisions where ALP determination reduces income (section 92(3)) - arm's length price - ALP determined at Nil for 'Repossession of Rig' set aside and addition deleted because such determination would reduce taxable income contrary to section 92(3) - HELD THAT: - The TPO/AO determined Nil ALP for the repossession receipt shown as Deletion in the fixed asset schedule. The Tribunal held that determining ALP at Nil for a receipt that increases the block value and thereby increases depreciation (reducing income) operates contrary to sub-section (3) of section 92 which disallows application of transfer pricing provisions where ALP determination has the effect of reducing income or increasing loss. Consequently, the Tribunal deleted the addition based on Nil ALP for the repossession receipt. [Paras 15, 16, 17, 18]Addition of the repossession amount deleted; ALP determination at Nil not given effect to as it would reduce income.Genuineness of an international transaction - Deduction claimed under 'Loss on Rig Repo' disallowed as it forms part of the non-genuine transaction - HELD THAT: - Schedule 9 showed a deduction for 'Loss on Rig Repo' which the assessee accepted formed part of the overall hire purchase and repossession arrangement. Since that core transaction has been held not genuine, the Tribunal directed that no deduction be allowed in respect of that loss in computing total income. [Paras 19]Deduction of 'Loss on Rig Repo' disallowed.Final Conclusion: The Tribunal held the hire purchase of the Rig to be not genuine; disallowed depreciation in respect of the Rig and directed the AO to allow depreciation on other undisputed assets in the block; sustained the components addition; rectified double disallowance of interest to a single addition; remitted the principal-installment item for verification of whether deduction was claimed; deleted the repossession-related transfer pricing addition under section 92(3); and disallowed the claimed 'Loss on Rig Repo'. The appeal was partly allowed and the assessment restored to the AO for limited consequential action. Issues Involved:1. Genuineness of the hire purchase transaction of the drilling Rig.2. Disallowance of depreciation on the Rig.3. Transfer pricing adjustments on various international transactions.4. Disallowance under Section 40(a)(i) of the Income-tax Act.5. Deduction claimed under 'Loss on Rig Repo'.Detailed Analysis:1. Genuineness of the Hire Purchase Transaction:The Assessing Officer (AO) and Transfer Pricing Officer (TPO) scrutinized the hire purchase transaction of a drilling Rig between the assessee and Mitchell Drilling Operations Pty. Ltd. The AO concluded that the hire purchase agreement was a sham transaction, designed to avoid tax liabilities. The AO's findings were based on the absence of penal clauses and the early repossession of the Rig, indicating a premeditated intention to return the Rig without financial liability. The assessee did not contest this finding, leading to the conclusion that the hire purchase transaction was not genuine.2. Disallowance of Depreciation on the Rig:The AO disallowed the depreciation claim of Rs. 17,78,123/- on the Rig, as the transaction was deemed non-genuine. The Tribunal upheld this disallowance but noted that the AO's action resulted in disallowing depreciation on all assets under the 'Plant and Machinery' block. The Tribunal directed the AO to allow depreciation on other assets within this block, excluding the Rig.3. Transfer Pricing Adjustments:The TPO determined the arm's length price (ALP) of four international transactions as Nil, leading to a transfer pricing adjustment of Rs. 3,58,67,002/-. The Tribunal addressed each transaction as follows:- Purchase of Components and Accessories: The assessee did not contest the Nil ALP determination for Rs. 43,015/-, and the Tribunal upheld this addition.- Payment of Interest under Hire Purchase Agreement: The Tribunal noted that the AO had disallowed Rs. 8,22,096/- twice—once as a transfer pricing adjustment and again under Section 40(a)(i). The Tribunal ordered the deletion of one instance of this amount to avoid double disallowance.- Payment of Installments of Principal under Hire Purchase Agreement: The Tribunal remitted this issue back to the AO/TPO to verify whether the assessee claimed a deduction of Rs. 47,31,600/-. If no deduction was claimed, the addition should be deleted.- Repossession of Rig: The Tribunal found that determining the ALP of this transaction at Nil would increase depreciation claims and reduce taxable income, contrary to the purpose of transfer pricing provisions. Thus, the addition of Rs. 3,02,70,291/- was deleted.4. Disallowance under Section 40(a)(i):The AO disallowed payments made to the non-resident entity under Section 40(a)(i) for non-deduction of tax at source. The Tribunal did not specifically address this issue separately but acknowledged the AO's action in the context of the overall assessment.5. Deduction Claimed under 'Loss on Rig Repo':The Tribunal noted that the assessee claimed a deduction of Rs. 13,86,684/- under 'Loss on Rig Repo' in the profit and loss account. Given the transaction's non-genuine nature, the Tribunal directed the AO to disallow this deduction.Conclusion:The Tribunal partly allowed the appeal, upholding some disallowances and directing further verification or deletion of others. The judgment emphasized the importance of genuine transactions and proper application of transfer pricing provisions.