Transfer pricing for depreciable assets: unsupported valuation can be rejected and actual cost fixed on a rational departmental basis.

The proviso to section 10(5)(a) of the Indian Income-tax Act, 1922 was treated as applicable where assets were transferred from a parent company to its wholly owned subsidiary and the surrounding circumstances supported an inference that the transfer was structured to secure depreciation on an enhanced cost. The court accepted the department's rejection of an unsupported valuation report and the adverse inference from non-production of reliable market-value material. It also accepted the departmental method of determining actual cost by taking the transferor's written down value and adding the balancing charge, holding that this was a rational basis on the facts and within the statutory discretion.

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Issues: (i) Whether the proviso to section 10(5)(a) of the Indian Income-tax Act, 1922 was attracted on the facts of the transfer of assets from the parent company to its wholly owned subsidiary. (ii) If the proviso applied, whether the basis adopted by the department for fixing the actual cost or written down value of the transferred assets was in accordance with law.

Issue (i): Whether the proviso to section 10(5)(a) of the Indian Income-tax Act, 1922 was attracted on the facts of the transfer of assets from the parent company to its wholly owned subsidiary.

Analysis: The proviso applies where assets previously used by another person are transferred and the Income-tax Officer is satisfied that the main purpose of the transfer, directly or indirectly, was reduction of liability to income-tax by claiming depreciation with reference to an enhanced cost. The Court held that the surrounding circumstances, including the relationship between the companies, the consideration paid by issue of shares, and the failure to place reliable material before the authorities to establish fair market value, justified the inference that the market value on the date of transfer was lower than the stated consideration. The valuation report was rejected for lack of supporting reasons and the adverse inference drawn from non-production of material was upheld.

Conclusion: The proviso was attracted and the finding was against the assessee.

Issue (ii): If the proviso applied, whether the basis adopted by the department for fixing the actual cost or written down value of the transferred assets was in accordance with law.

Analysis: The last part of the proviso empowers the Income-tax Officer, with previous approval, to determine the actual cost having regard to all the circumstances of the case. The Court held that, in the absence of reliable evidence from the assessee, the method of taking the transferor's written down value and adding the balancing charge under section 10(2)(vii) was a rational and permissible basis for determining the actual cost to the transferee. No infirmity was found in the departmental method adopted and upheld by the Tribunal.

Conclusion: The basis adopted by the department was in accordance with law and was against the assessee.

Final Conclusion: Both questions were answered against the assessee, the reference was disposed of accordingly, and costs were awarded to the revenue.

Ratio Decidendi: Where the statutory proviso is attracted, actual cost may be determined by the taxing authority on a rational basis having regard to all the circumstances, and a valuation unsupported by reasons or reliable material may be rejected with an adverse inference against the assessee.

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